How to Process Payroll in 8 Straightforward Steps

Part of your title as “employer” also includes “payroll processor.” When you hire employees, you have to add them to payroll, withhold the proper taxes, and pay employees. It’s all part of the job. But if you’re new to this employer role, you may not be exactly sure how to process payroll. We’ve written down the steps so you can become a pro at payroll processing in no time flat.

Payroll processing procedures

Payroll process procedures can vary from business to business. Procedures also differ depending on how you process payroll (which you will learn more about below).

For many businesses, payroll processing procedures include:

• Collecting time and attendance information
• Inputting payroll information
• Calculating payroll taxes
• Paying employees
• Providing employees with pay stubs
• Filing and depositing payroll taxes

It’s important for every business to organize and maintain payroll records in case a discrepancy or payroll audit comes up. You can store payroll records using digital files on your devices, the cloud (e.g., software), or a secure filing system (e.g., folders and cabinets).

Options for payroll processing

What you need to change in your payroll process depends on what method you use. You have a few options when it comes to processing payroll. You can:

• Calculate payroll by hand
• Use payroll software
• Outsource your payroll (e.g., PEO)

Luckily, if you run into problems and need to rethink your payroll process, you have plenty of options.

Before processing payroll…

Before you can even think about running payroll, you need to gather some information. To process payroll, you need to do following: 

• Apply for an Employer Identification Number (EIN)
• Get state and local tax IDs
• Collect Form W-4 and a state W-4 form (if applicable) from employees
• Choose a pay frequency or frequencies (e.g., weekly, biweekly, monthly, etc.)
• Determine how you will run payroll (by hand, using software, or outsourcing)
• Get employee direct deposit info, if applicable

If you’re a seasoned employer, you don’t have to worry about these tasks. But if it’s your first rodeo, you’ll need to put in the legwork prior to processing payroll. 

How to process payroll

Depending on how you run payroll (e.g., payroll processing software), your steps for handling payroll may vary. For example, if you use payroll software, the program typically does the payroll tax calculations for you. But if you do payroll by hand, you need to do your own calculations. 

So, how do you process payroll? Check out the following eight steps to process payroll.

1. Gather time card information

Depending on your business and if your employees are salaried or hourly, you may have some or all employees clock in and out and record their information on a timesheet. For hourly employees, you need this information to calculate hours worked and pay them properly. And, you may need to do the same with salaried employees, especially if they’re nonexempt.

Before you can calculate gross pay and payroll taxes, determine deductions, etc., collect time cards from applicable employees. The time cards let you know how many hours each employee worked and if you owe them any overtime (if they’re nonexempt). 

You can have employees fill out a paper timesheet for their hours, punch in and out through a time clock, or fill out their hours using time and attendance software. 

2. Compute gross pay

After you collect time cards from applicable employees, calculate each employee’s gross pay, which includes any overtime wages. If you use payroll software, the software handles this step for you (including overtime calculations). 

For hourly employees, you can calculate gross wages by multiplying the hourly wage by the number of hours worked in the period. For salaried employees, their gross pay is generally the same each period unless they earn overtime or other additional wages. To calculate gross wages for a salaried employee, divide their annual salary by the number of pay periods in a year (e.g., $50,000 / 26). 

Overtime is 1.5 times an employee’s regular pay rate for each hour worked over 40 in a workweek (unless state overtime laws say otherwise). Keep in mind that calculating overtime for salaried employees is different than computing it for hourly workers. 

If you have any bonuses, reimbursements, etc., be sure to include those in your employees’ gross wages, too. 

3. Calculate payroll taxes

You’re not quite done calculating just yet. Next, calculate each employee’s payroll taxes. Again, using payroll software or a tax professional can help simplify this step. 

Depending on the employee’s W-4 information and location, taxes can vary. You may need to withhold the following taxes:

• Social Security tax: 6.2% up to the Social Security wage base
• Medicare tax: 1.45% (or 2.35% with the additional Medicare tax rate of 0.9%)
• Federal income tax: Based on Form W-4 information
• State income tax: Based on W-4 information
• Local income tax: Varies by locality
• SUI tax: For employees in Alaska, New Jersey, and Pennsylvania
• State-specific taxes: Varies by state

As an employer, you’re also responsible for contributing to certain taxes, such as Social Security, Medicare, federal unemployment (FUTA), and state unemployment (SUTA) taxes. 

4. Determine employee deductions

Along with withholding taxes from employees’ paychecks, you may also need to subtract deductions. Employee deductions can be pre-tax or post-tax, depending on what they are. Some common deductions include:

• Wage garnishments
• Health insurance premiums
• Life insurance premiums
• Retirement plans
• Job-related expenses

If your employee has any deductions, make sure to deduct them accordingly. If you use payroll software, you can typically set up deductions so that they automatically deduct each pay period. 

5. Calculate net pay

After you calculate gross pay, withhold payroll taxes, and determine deductions, you can calculate your employees’ net pay. An employee’s net pay is how much they take home after taxes and deductions. 

To find net pay, simply deduct taxes and deductions from the employee’s gross pay. Use the following formula, if needed:

Gross Pay – Payroll Deductions = Net Pay

If you’re not doing payroll by hand (aka using software or a professional), you don’t have to worry about computing net pay yourself. 

6. Approve payroll

Calculate each employee’s net pay? Great! Now you can approve payroll by your payroll cutoff deadline. But before you do that, be sure to double-check your calculations to ensure that they’re accurate. If you use payroll software, consider also checking over everything one more time to ensure that you input everything correctly (e.g., employee hours). 

If everything looks good on your end, you can approve payroll and begin to…

7. Pay employees

Now comes the fun part: paying your employees. There are a variety of payment options to choose from, including:

• Direct deposit
• Cash
• Pay cards
• Checks
• Mobile wallet

You may decide to give employees an option about which method they want to use (e.g., direct deposit vs. check). Regardless of which method(s) your business uses, be sure to pay employees using your chosen pay frequency. And, make sure your frequency aligns with pay frequency requirements by state.

8. Distribute pay stubs

Last but not least, after you pay your employees, distribute pay stubs. You can distribute paper stubs to your team in person or via mail. Or, you can give employees access to electronic pay stubs that they can access through a software or employee portal. 

Whatever method you choose, make sure your employees have a way to view a breakdown of what was deducted from their pay for their records.

5 Signs it’s time to reevaluate your payroll process

You’re going to run into a few roadblocks when you’re responsible for managing payroll. You might forget to run payroll, need to spend extra time doing calculations by hand, or fail to keep up with it.

Maybe you’re in denial and not seeing the signs that it’s time for a change in payroll procedures. Or, perhaps you’re just too busy to even notice the flashing signs in front of you. If you run into one of the five indicators below, it might be time to reevaluate your payroll process.

1. Your business is growing

The fact that your business is growing is a great sign. But, it could also be a sign that it’s time to rethink the way you handle payroll.

If your company is hiring one employee after another, you may start struggling to keep up with payroll. This is especially true if you handle payroll by hand. The more employees you recruit, the more manual calculations you need to do.

If you’re handling payroll by hand and your business is growing, you might need to look into outsourcing payroll or using payroll software.

If your business is already using software to streamline your processes, you might want to consider looking into other payroll software options. Some software can only handle a certain number of employees (e.g., up to 50 employees). Make sure you find a software that will meet your business’s needs as it grows and hires employees.

2. You can’t keep up

Are you sick and tired of spending countless hours processing payroll? If you feel like there’s just not enough time in the day for your payroll responsibilities, you might need to do some reevaluating.

Contrary to many business owners’ beliefs, payroll processing does not have to be time-consuming. If you find yourself not being able to keep up with payroll, find ways to cut down on the time you spend doing it.

One way to reduce time while doing payroll is to let someone else handle the calculations and manual work for you. You can use a PEO to handle all of your payroll responsibilities for you. However, keep in mind that outsourcing payroll can get pricey.

If you’re handling a lot of payroll tasks manually, you can also simplify some of your responsibilities with software. Payroll software does all of the calculations for you. You can rest assured knowing the calculations are accurate. Plus, most software can print paychecks, offer direct deposit, and print pay stubs.

3. You’re spending too much money

If payroll is breaking your business’s bank, it may be a sign that it’s time to change up your payroll processing procedure.

When it comes to payroll, don’t be afraid to penny-pinch. There are plenty of payroll options out there that are affordable and reliable (e.g., Patriot Software).

If you feel like your business is spending too much money on processing payroll, look at other options. When it comes to software, take some time to research things like cost, features, and reviews. You might decide to switch payroll providers based on the information you find.

If you only run payroll for a few employees, you might consider going back to the basics. If you really want to save a buck, consider handling payroll taxes and calculations on your own. Sure, this method can be a little more time-consuming. But if you want to cut back on expenses, doing payroll by hand might be a good option for you.

4. You need a quicker payment method

Are your employees begging for direct deposit? Or, would they prefer a different method than your current one? If you answered yes to these questions, it’s a sign you might need to rethink your payroll’s payment method.

As a brief recap, employers have a few methods to choose from when it comes to paying employees. These payment options include:

• Cash
• Handwritten or printed paychecks
• Mobile wallets
• Direct deposit
• Pay cards

If you’re looking for a quicker way to pay employees, reevaluate your business’s payment methods. Just be sure to check with your state to find out about different payment laws (e.g., pay card laws by state).

Talk with your bank to see if they offer direct deposit or pay card options. You can also take advantage of different methods using payroll software. If you already have payroll software, find out what kind of payment methods they offer.

5. You’re struggling to stay compliant

As you (hopefully) know, a significant part of processing payroll is handling payroll taxes. To remain compliant, you must accurately calculate, withhold, and remit applicable payroll taxes (e.g., FICA tax). Not staying compliant can spell doom for your business.

Struggling to stay compliant is a major sign that it’s time to rethink your process. If you’re missing payments, miscalculating taxes, or forgetting to file your payroll forms, consider taking your payroll process in a different direction.

If you want to make sure you’re compliant, you can:

• Find a full-service payroll software option
• Use an accountant

Full-service payroll not only handles payroll calculations for you, but it also deposits and files your payroll taxes on your behalf. Instead of worrying about remembering to file or pay on time, the software does it for you.

An accountant or CPA can also handle your payroll taxes for you. You don’t have to worry about calculating, filing, or depositing any of your payroll taxes. However, hiring an accountant to handle your tax filings and deposits can cost you additional money.

Need a new method for processing payroll? Patriot’s online payroll makes it a breeze to pay employees with a simple three-step process. And, we offer free USA-based support. Try it free for 30 days today!

This article has been updated from its original publication date of August 16, 2021.

This is not intended as legal advice; for more information, please click here.