Payroll is part and parcel of being an employer, and a payroll checklist can make the job easier. Here's our ultimate payroll checklist that you need to consider before processing payroll.

Payroll Checklist Before Processing Payroll For The First Time

The following actions are once-off and should be performed before running payroll for the first time.

  • Apply for an EIN. The employee identification number enables you to make federal payroll tax payments. Depending on your area, you may also need to apply for state and local ID numbers similar to an EIN but used for state and local taxation.
  • Open withholding accounts. You'll also need to set up federal and state withholding bank accounts that will be used to safely hold deducted taxes until they can be allocated.
  • Collect employee pay and tax information. Once you have set up your federal, state, and local tax ID numbers and withholding accounts, the next step is to provide your full-time and part-time employees with W-4 forms and your contract employees with W-9s. Form I-9 may also be required to verify employee US eligibility.
  • Determine payroll budget and schedule. You have to figure out the total amount needed to pay employees and a suitable frequency for the payments. You need this information to ensure your employees are compensated adequately and accurately. Payment frequency can be bi-weekly, semi-monthly, monthly, or whatever schedule works for you and your employees. In addition, you should factor a tax payment schedule, so you know precisely when to allocate deductions.
  • Collect employee direct deposit information. Distribute direct deposit forms to employees or collect payment details so that employees can receive their wages directly.
  • Determine how you'll process payroll. Decide whether to process payroll manually, via software or outsource to a payroll processing expert.

Step-By-Step Checklist For Processing Payroll

Follow these steps as part of your monthly payroll checklist:

Step 1: Review And Verify Employee Information

Employee information is prone to changes, and this can potentially impact taxes. For instance, if an employee has relocated to a different state or acquired new benefits, you'll have to update the information. Similarly, if there have been new hires, you must distribute tax forms to collect the required employee information.

If there have been terminations, you need to factor in all the benefits that need to be paid out. Other checks that need to be made include confirming whether all your employees are true employees instead of contractors and if there have been salary raises or other wage changes. Checking if all the employee information you have is accurate is not a once-off step but should be done consistently.

Step 2: Calculate Gross Wages

Time tracking is crucial to the process of calculating gross wages. This step becomes more streamlined if you're using a time-tracking tool, such as an app that lets you track your employees' time at work accurately. That way, it's easy to figure out how much you should pay your employees before making any deductions.

The importance of keeping clear and complete records can't be overstated because you may need to provide proof of good record-keeping when an employee makes a complaint. Besides hours worked, you should also enter any additional payments, such as bonuses and commissions, into payroll.

Step 3: Calculate Net Wages

Once you have calculated gross pay, the next step is calculating taxes and deductions and deducting it from gross income so you end up with the net salary. The most common deductions to make include pre-tax deductions, such as employer-sponsored health insurance and retirement contributions.

You'll also need to withhold tax from each employee's paycheck to cover federal payroll taxes and sometimes state payroll taxes. After withholding taxes, it may still be necessary to make deductions, such as garnishments and employee retirement contributions. After taxes and deductions, you have net pay, which each employee gets to take home.

Step 4: Review All Calculations And Steps

When you have each employee's net pay, you're now ready to approve payroll. First, it's essential to review all calculations and steps to ensure you're working with accurate information. Even if you use payroll software, you'll still need to double-check your inputs, such as employee hours. To simplify this process, start by establishing checkpoints throughout the payroll process so that if any errors crop up, you can easily find the point of origination.

Your balance sheet statements and everything else should check out at the end of each process. Run your calculations again where necessary and fix any errors.

Step 5: Issue Payment To Employees

This is the part where your employees look forward to! They will certainly appreciate receiving compensation accurately and timely, something you can easily achieve with this payroll processing checklist template. When you approve payroll, you can then run payroll and start paying your employees according to their preferred payment method and your chosen payment schedule.

Direct deposit is the most popular option, but you can print checks, pay in cash or via mobile wallet. In addition to issuing payments, you'll also need to generate and distribute pay stubs to give employees a breakdown of their gross salary and any deductions made.

Step 6: Submit Payroll Withholdings

As mentioned, when calculating your employee's net pay, you withhold taxes and deductions. Typically, these deductions are reserved in withholding accounts, and at this stage, it becomes necessary to distribute the funds accordingly. Alternatively, deductions can be made as soon as they are withheld instead of being placed in a trust. It all depends on the tax payment schedule you set up before processing payroll.

The most common setup is to remit taxes quarterly, not every month, so it's better to place payroll tax withholdings in the appropriate account and remit them when the time comes. Besides payroll taxes, employers also have to pay the employer's federal income taxes and FICA and FUTA taxes withheld during the calendar year via Form 941 and Form 940.

Payroll Year End Checklist

Besides using a monthly payroll checklist, you should also have a payroll year end checklist that ensures your year end information is organized and up-to-date. At the same time, a payroll year end checklist is essential if you want to prepare for the coming tax year. Keep in mind that the year-end payroll process is a legal requirement, so use the following checklist to avoid fines, penalties, and the mounting pressure of deadlines.

  1. Check and verify business information, such as your EIN and company name and address.
  2. Check and verify employee information, such as full name, Social Security number, and contact information.
  3. Check and verify information concerning wages, benefits, and taxes. This step may also involve informing employees of unused benefits, recording all paychecks, and ordering, distributing, and filing W-2s. You'll also need to file other required tax forms.
  4. Set your year end bonus payroll.
  5. Resolve any outstanding issues.
  6. Update payroll information and set payroll policies, schedule, and compensation for the next year.

How To Make The Most Of This Payroll Checklist

A payroll checklist is one of the best tools to use to manage payroll processing better. It's especially helpful if you're new to the process and its intricacies. Besides using this payroll processing checklist template as a great starting point, keep the following tips in mind to ensure your employees receive compensation in a smooth and organized manner.

  • Take the time to create a tailored payroll. While this payroll processing checklist template gives you the confidence to tackle payroll processing, you'll still need to tweak it, so it's perfect for your business. Additional items to consider depending on your industry, location, payroll size, and other factors.
  • Implement a time-keeping system. Implementing a time-keeping system, such as an app that allows you to track your employee's time at work, can help make all your payroll calculations easier.
  • Perform a payroll internal audit checklist. It's essential to perform regular payroll audits. A payroll internal audit checklist can help you stay compliant and improve internal controls.
  • Consult with payroll processing professionals. Outsourcing payroll to experts can be more beneficial once you're familiar with this payroll checklist. That's because you're entrusting the work to knowing that you can easily track.
  • Make use of payroll software. Automating payroll can make life much easier and further streamline your payroll checklist.
  • Ensure compliance at all times. This involves keeping up-to-date records, making on-time tax payments, and regular reporting of any payroll changes to the IRS.

Ready to start processing payroll? Why not download a payroll checklist pdf copy so you can easily refer to the steps and tips outlined above to help you stay on track? You'll find that while the process is generally complicated, it becomes less intimidating once you have a checklist to help you master your payroll obligations and stay compliant.