How To Pay Employees
In this guide to paying your employees, learn everything you need to know about payroll taxes, payroll forms, pay day laws, and more.
Wondering how to pay employees? As it takes knowledge of payroll taxes, pay day laws, percentage calculations, and much more, it’s no surprise that you may be a little out of depth when handling your business’s first few payroll runs. Fortunately, we’ve got you covered.
This guide breaks down everything you need to know to pay your employees, including choosing employee payment methods, setting a pay schedule, calculating employee earnings, payroll taxes, and much more. Let’s get started.
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How To Pay Employees In 11 Steps
To pay employees, you’ll need to complete payroll administration tasks, calculate employee pay, make withholdings and deductions, and finally, submit your payroll run. Ready to make your first payroll run?
Here’s a step-by-step explanation of how to pay your employees in just 11 steps.
1. Handle The Legalities: Your Business EIN, Employee Tax Forms, & New Hire Reporting
There are several legal prerequisites you’ll need to handle before paying your employees, including:
- Getting an EIN for your business
- Completing and submitting employment forms
- New-hire reporting
- Employee classification
Until you fulfill each of these payroll prerequisites, you will not be able to legally pay your employees. Fortunately, most of these tasks aren’t time-consuming and can become the foundation of your business’s new-hire onboarding process.
Here’s a look at the legal prerequisites you’ll need to complete to run payroll for your business.
2. Set A Payday Schedule According To Your State’s Payday Laws
When it comes to choosing a pay schedule, it’s essential to consider your state’s payday laws. Most states have existing payday laws that dictate the maximum period between employee payments allowed based on a variety of factors, including the type of worker you’re paying, the employee’s annual salary, and whether the employee is earning supplemental pay.
However, you should also consider your business’s cash flow when deciding on a pay schedule. Your business’s payroll budget can take up a significant portion of your business’s revenue. So, it’s best to plan around your business’s cash flow (ie. when you regularly have money in the bank) when deciding on your business’s payday.
Finally, be sure to consider the industry standard paydays. If your industry typically pays employees biweekly and you’re paying once a month, you’ll likely scare off prospective employees — even if you’re in compliance with your state’s payday laws.
3. Choose Which Employee Payment Methods You’ll Offer
When choosing employee payment methods, you’ll need to consider which options fit your budget, are the most convenient for your employees, and are best for record-keeping. Generally, the most popular payment methods in the US are direct deposit and paper checks.
Both direct deposit and paper check payments organically generate a record trail when you use them, so they’re great for tax and accounting record-keeping. Direct deposit costs are usually less than a dollar per payment, depending on your business’s bank.
However, paper checks can be a little more costly and time-consuming, as you have to decide where to order business checks, keep a stock of business check paper, and potentially subscribe to a checking printing software.
4. Choose Whether To Use Payroll Software Or A DIY Payroll Process
Regardless of whether you choose to use payroll software or process payroll manually, the payroll processing method remains the same. Still, deciding between using payroll software or DIY payroll processing is a major decision with an impact on a business’s owners finances, time, and record-keeping processes.
Keep reading for a comparison as to when you should choose payroll software or DIY payroll processing for your business.
5. Calculate Gross Pay For Your Employees
To begin processing payroll, you’ll need to calculate the gross pay for your employees.
An employee’s gross pay is the total of all their earnings before any payroll taxes are withheld or deductions made. Gross pay includes earned wages for salary and hourly employees, plus any supplemental earnings, such as tips, overtime pay, bonuses, commissions, awards, back pay, and more.
6. Calculate & Withhold Payroll Taxes
Employers are responsible for calculating and withholding payroll taxes on behalf of their employees. The following taxes are the most common taxes withheld by employers:
- Medicare taxes
- Social Security taxes
- Federal Unemployment Tax Act Taxes (FUTA)
- State Unemployment Taxes
- Income Taxes
To calculate payroll taxes, you’ll need to manually multiply each individual tax by the employee’s gross earnings.
7. Make Employee Payroll Deductions
In addition to payroll taxes, employee earnings are also reduced by payroll deductions. Payroll deductions may be voluntary or involuntary. Additionally, payroll deductions may be taken from pre-tax and post-tax earnings.
Here’s a quick rundown of some of the most common payroll tax deductions:
- Retirement account contributions
- Insurance premium payments
- FSAs and HSAs
- Union Fees
As an employer, you’re responsible for making payroll deductions on behalf of your employees and ensuring that the deducted funds are properly allocated.
For example, if funds are deducted to cover an employee’s payment toward their employer-sponsored health insurance, you’ll need to make that payment with the funds you deducted from your employee’s paycheck.
8. Calculate Net Earnings For Each Employee
Once you have made all payroll tax and additional payroll deductions, it’s time to calculate your employee’s net earnings. An employee’s net earnings are the total wages an employee takes home after taxes and deductions have been made.
To calculate an employee’s net earnings, simply subtract the total amount of payroll taxes and deductions from their gross earnings for the pay period.
9. Review & Make Payroll Corrections
Once you’ve finalized all the math for your employees’ paychecks, it’s time to double-check it. Save yourself the time and money it takes to correct an erroneous payroll run. Here are some details to check for when reviewing your payroll run before submission:
- Accuracy of employee earnings
- Which payment methods are selected for each employee
- Which bank account are the funds coming from
- Correctly reported employee hours
- Correct pay period dates
Once you’ve gone back and corrected any errors in your payroll run, you can submit your payroll.
10. Pay Your Employees
Once payroll is submitted, it’s time to pay your employees. Depending on the type of payment method you use to pay your employees, this process may look different.
If you pay your employees using direct deposit, you must remember to submit the transactions to your bank on time to ensure that employees aren’t paid late.
If you pay your employees by check, you can simply print checks on payday and distribute them your to employees.
11. Make Payroll Tax Deposits & Deduction Payments
Now it’s time to make payroll tax deposits to the federal and state government with the money you withheld from your employees’ paychecks and your own contributions.
Additionally, you’ll need to send out payments for any other deductions you made to your employee paychecks.
Employment taxes, including social security, medicare, and income taxes must be deposited on a monthly or semi-weekly basis, depending on the total tax liability you reported on line 9 of Form 944 or on line 12 of Form 941.
It is mandatory to make federal tax deposits via electronic funds transfer through the government’s Electronic Federal Tax Payment System or EFTPS.
FUTA tax deposits are due on April 30th, July 31st, October 31st, and January 31st during each tax year.
State payroll tax deposit due dates and payroll deduction due dates vary, but you’ll need to get that information to ensure that your deposits and payments are made on a timely basis.
The Bottom Line On How To Pay Employees
Fortunately, understanding how to pay your employees is pretty straightforward once you learn payroll basics and handle all set up tasks.
Many small business owners find that the most challenging part of paying employees is getting payroll taxes right, as payroll tax laws and HR regulations can vary greatly depending on where you’re located. Fortunately, we have several state payroll tax resources to help business owners who are new to payroll and HR get their bearings.
Check out our state payroll tax guides:
- New York State Payroll Tax Guide
- California Payroll Tax Guide
- Texas Payroll Tax Guide
- Arizona Payroll Tax Guide
- Florida Payroll Tax Guide
- Maryland Payroll Tax Guide