Let’s face it. Doing payroll is nobody’s idea of fun. Whether you’re a business owner or a manager, you probably aren’t looking forward to the process of calculating wages, withholding taxes, and filling out IRS forms.
But, as is the case for many tedious but necessary business processes, technology can automate parts of the payroll process for you. How much can it take off your plate? That depends on the software you’re willing to invest in. You have three options:
- Run payroll manually with no software whatsoever.
- Use a payroll software. This option allows you to automate tax withholding and wage payment, but still leaves you responsible for calculating employee wages. But, of course, you have to pay for the software.
- Combine workforce management and payroll software. This option saves you the maximum amount of time by automating wage calculation and payroll itself, but adds a second piece of software to pay for.
The right choice depends on your business. But generally speaking, you’ll want to automate more of the process the more employees you have. Below, we’re going to lay out the steps for each method of running payroll and help you decide which makes sense for you. Please note that this post is purely educational. You should also consult with a professional if you’re looking for specific advice on payroll for your business.
First, knock out the payroll essentials
There are a few basic steps to the payroll process that you’ll need to complete regardless of whether or not you’re using software. You can probably skip this section if you’ve ever run payroll before. Keep in mind that there are other steps you'll have to take to maintain accurate payroll records -- not just when you run payroll each pay period, but when you pay your payroll taxes throughout the year
Step 1: Get your Employer Identification Number (EIN).
Your EIN is a unique nine-digit code the IRS uses to identify your business. You’ll need to include it on any forms you send to them. Think of it as a social security number for your company. You can apply for one here.
Step 2: Get your employees to fill out their W-4s.
Next, your employees need to complete the IRS’ Form W-4 to record their filing status and personal withholding allowances. Every time you bring on someone new, they’ll need to fill this out as part of the onboarding process. If you hire any independent contractors, they'll instead need to fill out IRS Form W-9. Please note though that the payroll process for independent contractors is slightly different, as you generally won't be responsible for withholding taxes from these workers' paychecks.
Step 3: Decide on a pay schedule.
How often will you pay your employees? Most businesses choose either weekly, bi-weekly, semi-monthly, or monthly, with bi-weekly and weekly being the most common.
Step 4: Set up direct deposit.
Yes, you can hand out physical checks each payday, but it’s pretty rare these days. Research shows that 82% of workers are now paid by direct deposit. Workers also report that direct deposit gives them greater control of their finances and feels more secure. It’s also not hard to set up. All you need to do is gather your employees’ bank account numbers and routing numbers, then provide that information to your business’ bank or other direct deposit provider.
Once you’ve taken care of the essentials, you’re ready to determine which process -- and which tools -- you’ll use to do payroll each pay period.
Option 1: How to do payroll manually, without software
Here are the steps you need to follow each pay period if you want to go it alone and run payroll manually.
Step 1: Calculate your employees’ wages.
Add up all the hours each employee worked, subtract any break time, and multiply the result by their hourly pay rate. Assuming you use paper time sheets, this step will be easier if you transcribe the hours into Excel and do the calculations on your computer. Microsoft even offers a ready-made template you can use. And remember, depending on your local laws and each employee’s classification, you may need to calculate overtime wages as well.
Step 2: Calculate how much to withhold for taxes.
The next step is to subtract the appropriate amount to withhold from each employee’s paycheck for taxes such as:
- Federal, state, and local income taxes
- Social security
- Federal and state unemployment taxes
The exact amount will vary for each employee based on the allowances outlined on their W-2. You can use the IRS’ tax withholding calculator to determine the right amount to withhold for individual employees. The Excel template we linked to in Step 1 also allows you to input withholding percentages for different types of taxes. Either way, be sure to double check your math, as you can incur big fines for any mistakes you make.
Step 3: Pay your employees.
Now that you’ve calculated how much to withhold for each employee, subtract that amount from their total wages and you’ve got their take-home pay. Provide a document stating each employee’s take-home pay to your direct deposit provider --they can let you know how to format it -- and the money will be deposited into their bank account.
Step 4: Pay your taxes.
Next, you need to pay your taxes by periodically depositing the money you withhold to the IRS. You won’t necessarily be making these payments on the same schedule you pay your workers, so this step may not be part of your payroll process per se. Instead, you’ll pay your taxes on either a monthly or semi-weekly basis depending on your tax liability in the previous year. The IRS explains more here.
You need to make make your tax deposits electronically using the Electronic Federal Tax Payment System (EFTPS), which you can register for here.
After that, you’re done with payroll! There are other tax-related tasks you’ll need to complete throughout the year, such as your quarterly returns and annual filings, but these are the steps you need to complete to pay your workers and do your taxes each payroll period. Please also note that there may be additional steps depending on what state you’re in.
Option 2: How to do payroll with a payroll software
Understandably, many businesses find the manual payroll process burdensome, especially as they hire more employees. That’s where payroll software comes in. A good payroll solution can automatically tally your employees’ wages, withhold the correct amounts, send in your tax payments and filings, and even handle your direct deposits to employees.
There are several payroll providers, but popular options include ADP, Intuit Quickbooks, and Paychex. Here’s what your payroll process will look like once you’ve chosen a payroll software and imported your employees’ W-2’s.
Step 1: Calculate your employees’ hours worked.
Unfortunately, even with payroll software, you’ll still need to manually input the hours each of your employees worked. This means you’ll once again need to look at your time sheets, add up all the hours worked for each employee, and subtract time for breaks. Be sure to go back and check your work too!
Step 2: Enter the hours into your payroll software.
Here’s where your technology investment starts to pay off. Instead of calculating wages and withholding amounts, you can just enter the hours into your payroll software and let it do that for you. The software will automatically determine how much gets paid out to each employee and how much is withheld.
Step 3: Click to run payroll.
This one’s pretty self-explanatory. Once your payroll software has calculated everyone’s take-home pay and withholding amounts, click whatever button runs payroll (likely labeled “run” or “send”) and that’s it -- you’re done. The software will automatically pay for your employees. However, depending on the payroll provider you use and the level of service you're paying for, you may still need to pay taxes yourself. But many services will remit them for you.
Option 3: How to combine workforce management and payroll software
Payroll software is great, but you still have to deal with that pesky step of adding up your employees’ hours worked. It may sound simple, but it quickly gets complicated the more employees you have -- especially if you have a big group of part-time employees working varying numbers of shifts, as is the case for many SMBs.
That’s where a workforce management software like Nowsta comes in handy. Workforce management software refers to any solution that automates scheduling and time and attendance tracking. As you’ll see below, it makes the payroll process even faster than it is with payroll software alone.
Step 1: Automatically track employee hours in your workforce management software.
Workforce management software lets you ditch paper time sheets and instead enables your employees to clock in through a tablet or smartphone. Don’t worry, these solutions come with built-in protections that prevent employees from fudging their time. Each employee’s hours worked are automatically logged and stored in the software.
Step 2: Export your employees’ hours worked and load it into your payroll software.
Your workforce management software can export all your employees’ worked hours as a CSV file, which you can then feed into your payroll software. Solutions like Nowsta can ensure these files are readable for any payroll software.
Step 3: Click to run payroll.
Just like in Option 2, your payroll software can then calculate your employees’ wages and tax withholdings based on the hours they’ve worked.
As you can see, Option 3 eliminates nearly all need for manual work on your part -- no more transcribing, counting, or confusion.
When should you make the switch?
The more parts of the payroll process, the more time you save and the fewer mistakes you have room to make. But of course, there are costs -- the software isn’t free, and you’ll have to teach managers how to use it. If you’re a small company with one or two employees, you can probably save money and get by just fine running payroll manually.
So, when should you make the switch? There’s no defined time table.
But one thing’s for sure: As your business grows, the manual payroll process will become too time-consuming and error prone. And eventually, so too will the process of running payroll with just a payroll software. Workforce management is the final piece of the puzzle that reduces payroll to just a few clicks, allowing you to focus on running your business.
My advice is to not wait until your current process has become totally overwhelming. Make the jump a little earlier than absolutely necessary, so you can learn your new tools without the stress of drowning in too many paper time sheets. That way, when you really start to grow, your payroll process will be a well-oiled machine you can seamlessly add new employees into as you hire them.