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Payroll Checklist for Small Businesses

David Gargaro
David Gargaro

There are many steps in running payroll, and it's important to understand them all.

Running payroll is a detail-oriented process that can be difficult and time-consuming. While some business owners choose to do this on their own, many companies use payroll software to streamline the payroll process or hire a payroll processing service to handle these tasks. To ensure your payroll processing is being done correctly, whether you are doing it on your own or having others handle the responsibilities for you, it is important to understand all of the steps involved.

The below is a general payroll processing checklist to follow. However, this list cannot account for every variable in a specific company's payroll (e.g., geographic location, industry, method of paying employees), so you need to fully understand the process and how it applies to your business.

What information do you need to process payroll?

Before processing your company's payroll for the first time, you will need the following information and accounts:

  • Employer identification number (EIN) to identify your company for tax purposes
  • State and local tax identification numbers (for respective taxation and recordkeeping)
  • Employees' tax information
    • Form W-4 (full- and part-time employees)
    • Form W-9 (contract and freelance employees)
    • Form I-9 (to verify an individual's eligibility for employment in the U.S.)
  • Employees' wage or salary information
  • Employees' direct deposit information (if applicable)
  • Federal and state withholding accounts to hold deducted taxes until paid to respective recipients
    • Electronic Federal Tax Payment System (EFTPS) account
    • State unemployment insurance account
    • State new-hire reporting account
    • State workers' compensation insurance account
  • Payroll budget account
  • Payroll schedule
  • Direct deposit service and/or paper checks
  • Tax payment schedule

When you process payroll, it is also important to do the following:

  • Maintain organized, detailed and complete financial records.
  • Pay all state and federal taxes on time to avoid penalties.
  • Report hiring changes to the IRS within the required timeline.


Editor's note: Looking for the right payroll software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

 

Payroll processing tips

The following strategies will also help you process your payroll more effectively:  

  • Set checkpoints at various points in the payroll process to "tie out" wages and hours. Implement a process to ensure your balance sheet statements are accurate and all numbers match up at each stage in the payroll process.

  • Follow the Fair Labor Standards Act (FLSA) and its regulations for maintaining your company's payroll records. How long you are legally required to keep payroll documents can vary from three to seven years. You might be required to maintain employment records for longer than this, though, depending on the types of roles at your company.

  • Work with a payroll processing firm. A company that specializes in payroll processing can get you started on processing your payroll via online payroll software or handle it completely, depending on your needs and comfort level.

Bottom LineBottom line: Setting up checkpoints in your payroll process and following the FLSA can help you stay compliant. Consider hiring a payroll processing firm to manage and process your company's payroll.

Step-by-step payroll checklist

Once you're certain that you have all the necessary information and have set up the requisite accounts, follow these steps to process your payroll.

Step 1: Review employee information.

Review all employee information before running payroll to ensure you have not omitted new information and no information has changed.

When reviewing current employees' information, check for changes in any of the following factors:

  • Mailing address. An employee moving to a new state or locality can impact their tax status.
  • Tax withholding. Changes in a person's employment status or job position may affect how much tax must be withheld from their checks.
  • Employment status. Changes in a person's employment status can affect their tax status.
  • Job title. Check for transfers to a new position.
  • Wage/salary. Check for changes in employees' pay rate, changes in scheduled hours, and any retroactive pay.
  • Benefits. Check for changes in benefits that can affect tax status and the amount of money withheld from an employee's paycheck.
  • Terminations. See if terminated employees have accrued vacation time or paid time off that you might be legally required to pay out.

When reviewing new employees' information, check the following:

  • Full name and mailing address (required if paying by check)
  • Social Security number or EIN from IRS
    • Use Form W-4 for employees.
    • Use Form W-9 for contractors.
  • Individual's status as either an employee or an independent contractor
  • Eligibility for U.S. employment (Form I-9)
  • Employee tax withholding information (Form W-4, regular employees only)
  • Rate of pay (wage vs. salary)
  • Other earnings (e.g., sales commissions or tips)
  • Whether earnings are subject to garnishment
  • Employee benefits that require withholding
  • Bank account information for direct deposit (if required)
  • Completion of all onboarding paperwork, such as internal policy acknowledgments and relevant tax forms

Step 2: Review and calculate gross pay.

Calculate how much money each employee will receive before withholdings. Note how often you pay employees (e.g., weekly, biweekly or semimonthly), as different states have their own requirements for the timing of the pay date after the end of the pay period.

TipTip: Make sure to keep clear, complete and consistent records of the hours your employees worked. Well-maintained records will help you calculate gross pay correctly and protect you against potential complaints and legal proceedings from employees.

Follow these steps for employees who earn an hourly wage:

  • Collect employees' signed timecards or approved timesheets from managers. Ensure that all timesheets have been submitted.
  • Review the number of hours entered for each employee for accuracy.
  • Calculate and record overtime.
  • Calculate and record paid time off.
  • Review, calculate, and record additional pay, including bonuses, commissions, and retroactive pay.

Follow these steps for salaried employees:

  • Calculate and record each employee's gross pay.
  • Calculate and record paid time off.
  • Review, calculate, and record additional pay, including bonuses, commissions, and retroactive pay.

Step 3: Review and calculate net pay.

The first step is to calculate how much money must be deducted from each employee's pay for taxes and withholdings. Before calculating taxes, take out pretax contributions for items such as these:

  • Benefit premiums (pretax)
  • Health savings account contributions (pretax)
  • Retirement fund contributions (pretax for 401(k) and non-Roth IRA)
  • Reimbursements for expenses (not taxed)

You then will calculate any company-matched contributions to each employee's healthcare or retirement funds. Double-check all recorded locations and amounts for accuracy. Ensure that employees working in different states are not taxed at the same rate as the employees in your state.

Finally, calculate all taxes and withholdings, which include these:

  • Federal income tax
  • State income tax
  • Local taxes
  • Medicare tax
  • Social Security withholdings
  • Wage garnishments (where applicable)

Once you know how much money should be taken out of each paycheck for taxes and withholding, you can subtract that from their payment amounts.

Step 4: Conduct a final review.

Do a final pass on all calculations to identify discrepancies in the data before writing a paper check or entering the amount for direct deposit. Update your records where necessary.

Step 5: Share information with stakeholders.

Following your review of the payroll, share any required information with all stakeholders (e.g., department leaders, managers and vendors). Payroll is a significant budget item for your company, which is why stakeholders need payroll reports that apply to their department.

Step 6: Make payments.

Review each employee's payment instructions. Then make the requisite payments by doing one or both of the following:

  • Print and sign paper checks.
  • Enter and approve direct deposit payment.

Step 7: Distribute withholdings.

Deposit any money withheld from employees' pay into the proper accounts for payment of the following:

  • State, local and federal taxes
  • Retirement funds
  • Benefits providers

Distributions should also include any company-matched contributions.

Image Credit: AndreyPopov / Getty Images
David Gargaro
David Gargaro
business.com Contributing Writer
David Gargaro is a content writer and copy editor with more than 20 years of experience in multiple industries, including publishing, advertising, marketing, finance, and small business. He has written on B2B-focused topics covering business technology, sales, marketing, and insurance. David has a Bachelor of Arts degree in English and Actuarial Science from the University of Toronto. He served as the managing editor of a small publishing company, and self-published a book called How to Run Your Company… Into the Ground.