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
After you've determined the gross pay, which includes overtime hours and fringe benefits, the next crucial step in payroll management is calculating taxes and deductions. This is subtracted from the gross income to arrive at the net salary. Common deductions include pre-tax items like employer-sponsored health insurance premiums and retirement contributions.
You'll also need to consider federal income tax withholding and, depending on the state, state payroll taxes. After these withholdings, additional deductions such as wage garnishments and voluntary deductions for employee retirement contributions may apply. Once all these are accounted for, you arrive at the net pay, which is what each employee takes home.
Step 4: Review All Calculations and Steps
Before you approve the payroll, it's vital for business owners to review all calculations and steps meticulously. This ensures the accuracy of payroll records, even if you're using a payroll service provider. Double-check inputs like time cards and employment status to avoid errors. To streamline this process, establish checkpoints throughout the payroll period. This way, if any discrepancies arise, you can easily trace back to the point of origination.
Your balance sheet statements and all other financial documents should align at the end of each process.
If discrepancies are found, recalculate and rectify any errors according to company policy.
Step 5: Issue Payment to Employees
This is the moment your employees have been waiting for. Ensuring timely and accurate compensation is easier when you have a well-structured payroll processing checklist. Once you approve the payroll, you can proceed to issue payments through various methods as per your payroll schedules.
Direct deposit is often the most popular, but paper checks, cash, and mobile wallets are also options. Alongside issuing payroll checks, you'll also need to generate and distribute pay stubs to provide employees with a breakdown of their earnings and deductions.
Step 6: Submit Payroll Withholdings
After calculating each employee's net pay and making the necessary withholdings, these funds typically go into withholding accounts. Depending on your tax filing schedule, these can either be remitted immediately or reserved for later. Most businesses opt to remit taxes quarterly rather than monthly.
Besides payroll taxes, employers are also responsible for other financial obligations like FICA and FUTA taxes. These are usually submitted through forms like Form 941 and Form 940, in accordance with the tax rates applicable to your business.
By following these steps, you not only comply with legal requirements but also contribute to better business days through effective payroll management.
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.
- Check and verify business information, such as your EIN and company name and address.
- Check and verify employee information, such as full name, Social Security number, and contact information.
- 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.
- Set your year end bonus payroll.
- Resolve any outstanding issues.
- 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.
Conclusion
Managing payroll is a complex yet crucial aspect of running a successful business. Whether you're handling business payroll in-house or through a payroll provider, it's imperative to maintain accurate employee records and adhere to all payroll requirements. This includes not just calculating net wages but also ensuring that payroll tax withholdings are accurately deducted and remitted.
Federal income taxes, as well as state income taxes, must be carefully calculated based on each employee's filing status. This is a critical part of payroll accounting that can have legal repercussions if not done correctly. Moreover, payroll deductions for things like health benefits or retirement contributions need to be meticulously managed to ensure compliance with tax laws.
In summary, effective payroll management goes beyond just cutting checks. It involves a comprehensive understanding of payroll deductions, employee payroll taxes, and various other financial obligations.
Thanks to paying close attention to these details, you can maintain a compliant and efficient payroll system that benefits both the employer and the employees.
