A simple way to improve morale, productivity, and job satisfaction is to pay employees accurately and on time. A well-executed payroll system does just that while ensuring the company complies with local, state, and federal regulations.
This guide will show businesses how to do payroll properly.
5 steps to successful payroll management
Follow these steps for setting up a payroll system that works:
1. Register for an Employer Identification Number (EIN)
For tax reporting purposes, the IRS requires new employers to register for an employer identification number (EIN) — a unique nine-digit number.
To ensure regulatory compliance, each employee needs to provide essential details like their Social Security number and completed IRS forms, such as the W-4 (tax withholding) and I-9 (work eligibility). It’s wise to periodically verify this information, especially during tax season or employee onboarding.
3. Set or review the payroll schedule
Before deciding how to pay employees, decide how often to run payroll — usually weekly, biweekly, or monthly. Make sure the established schedule complies with state laws and supports employee preferences. It’s also worth looking into extending pay periods to simplify reporting and reduce administrative costs.
4. Calculate gross pay and deductions
Calculate employees’ gross pay based on either their salary or the number of hours worked throughout the pay period. Then apply mandatory deductions like federal, state, and local taxes, and
deduct benefits like health insurance, retirement contributions, and payroll advances. What’s left after deductions is
employee net pay — the amount they take home.
If the company offers payroll advances, most providers will deduct them from the payroll directly. EarnIn provides a simpler alternative. EarnIn’s Cash Out tool allows employees to access up to $150/day, with a max of $750 per pay period, on the same day they work – starting at $2.99 per transfer — all without requiring a payroll integration or deductions. On payday, EarnIn automatically debits the amount accessed from the employee’s linked bank account.
5. File tax returns and maintain payroll records
Payroll compliance requires accurate tax filings, including forms like W-2s for employees and 1099s for contractors. To prevent errors and penalties, consider working with certified public accountants (CPAs) or payroll service providers who specialize in tax compliance. These professionals can handle filings, monitor changing tax laws, and keep the business in good standing with federal and state authorities.
4 payroll best practices
Learning how to do payroll for a small business is one thing, but as the company grows so will the complexities of wage management. Consider these strategies:
Adopt cloud-based payroll software. Cloud technology automates payroll deposits and other tasks, reduces errors, and offers real-time insights from anywhere, simplifying compliance tracking and scaling operations seamlessly.
Leverage outsourced HR services. Outsourcing payroll and HR functions allows leaders to focus on core business activities while experts handle compliance, tax filings, and benefits administration.
Engage a CPA. CPAs’ expertise in tax filings and audits can mitigate risk as the business grows.
Enhance payroll with value-added features. The payroll landscape is constantly evolving, offering new ways to improve the employee experience and streamline processes. Value-added features like Earned Wage Access provide employees with a financial safety net for unexpected expenses.
5 common payroll mistakes to avoid
Even the most seasoned business owners make errors when processing payroll — sometimes with costly consequences. Awareness is key to prevention, so keep an eye out for these common mistakes:
1. Failing to maintain payroll records
To comply with federal laws, keep payroll records for a minimum of three years. Disorganized or missing records can create legal challenges during audits.
2. Missing federal tax deadlines
Late tax filings can result in penalties and interest charges. Avoid this mistake by using automated tools or outsourcing to professionals.
3. Misclassifying employees
Many employers incorrectly categorize employees as contractors rather than full-time staff, which can lead to compliance issues and back taxes. Regularly review classifications to align with IRS guidelines.
4. Errors in pay calculations
Missteps in calculating overtime, benefits deductions, or wage rates can erode employee trust and create legal risks. Double-checking manual entries can help, but using automated software for wage calculations greatly reduces error.
5. Delaying payroll processing
Employees count on businesses to pay them on time. Payroll processing delays create hardship for employees, making them more likely to leave. In some jurisdictions, delays can even result in fines.
4 tips for cutting payroll costs
Optimize payroll systems with a few simple adjustments. Here’s how to save time and money without sacrificing accuracy or employee satisfaction:
1. Automate payroll processes
Automation eliminates manual errors, ensures compliance, and reduces time spent on repetitive tasks. Try automating:
2. Outsource some payroll tasks
Partner with professionals for tasks like tax filings, compliance audits, and year-end reporting. Outsourcing these functions reduces administrative burdens while ensuring accuracy.
With EarnIn’s EWA solution, businesses can give employees access to their earned wages without the hassle, time, or expense of managing manual payroll advances.
4. Reduce payroll run frequency
Run payroll on a biweekly or monthly pay schedule to cut down on administrative time and processing fees.
Frequently asked questions
How often should an employer process payroll?
It depends on the business structure, employee agreements, and state laws. Common schedules include:
Weekly. Weekly pay is often preferred for hourly employees, though it increases administrative tasks.
Biweekly. Biweekly is a popular choice for balancing employee expectations with administrative efficiency.
Monthly. For businesses with salaried employees, monthly payments offer cost savings on payroll processing.
Act promptly to minimize penalties. Follow these steps:
Correct the error. Adjust withholding amounts or recalculate contributions as needed.
File amended returns. Submit corrections to the IRS or state agencies using the appropriate forms, like
IRS Form 941-X for federal payroll tax corrections.
Consult a professional. For complex errors, work with a CPA or tax advisor to resolve issues efficiently.
What’s the difference between net pay and gross pay?
Gross pay is the total amount an employee earns before deductions, including wages, overtime, and any other forms of compensation. Net pay, often called “take-home pay,” is the amount an employee receives after their employer subtracts all deductions from their gross pay. These deductions typically include federal, state, and local taxes, plus benefit contributions like health insurance and retirement plans.
How are payroll taxes calculated?
Payroll taxes are mandatory contributions that employers withhold from employee paychecks and remit to government agencies. These taxes typically include federal income tax and sometimes state and local income taxes. Employers are also responsible for matching contributions like Social Security and Medicare taxes, and they need to pay additional taxes like unemployment insurance.
To calculate payroll taxes:
Determine taxable income for each employee based on gross wages.
Apply the applicable tax rates for federal, state, and local taxes.
Factor in deductions, exemptions, or credits employees may qualify for.
Simplify payroll advances with EarnIn’s Earned Wage Access
Managing payroll is challenging without the added complexity of offering payroll advances. Traditional advances — the kind that require employers to front money to their employees, adjust payroll calculations, and manage additional administrative tasks — often require a heavy lift from the payroll team.
That’s not the case with EarnIn’s no-integration
EWA solution. EarnIn provides employees with the flexibility to access their earned wages before payday without requiring employers to adjust their payroll systems or handle deductions. Employees can get up to $150/day, with a max of $750 per pay period,
and same-day transfers starting at just $2.99.
On-demand pay is just the beginning. EarnIn also offers employees tools to help them effortlessly save with every paycheck, monitor their credit,
and more, empowering them to build financial wellness — all at no cost to businesses.
