How To Pay Employees: Business Guide

The right payroll management system is critical to a business’ operation, not only ensuring employees get paid on time but also staying on top of legal requirements.

Using this article, you will be able to navigate the complexity of payroll processing with ease and precision. We’ll explain the essential steps involved in how to pay employees.

TABLE OF CONTENTS

Preparing For Payroll
Calculating Employee Compensation
Payroll Distribution
Managing Employee Payroll Records
How To Pay Employees FAQ
Payroll Management Software ✅

Preparing For Payroll

To ensure a seamless and compliant payroll process, businesses must collect essential employee paperwork and understand payroll laws before starting payroll processing.

1. Collecting Employee Paperwork

When you onboard employees, you have to collect all the right paperwork. For payroll integrity to work, you’ll need the W-4 form to withhold federal taxes, the I-9 form to verify work eligibility, and direct deposit information for payments. It’s also priority to address missing documents from existing employees as soon as possible.

2. Understanding Payroll Laws

It’s crucial to comply with payroll laws at the state, federal, and local levels. This will ensure that the company operates within the legal framework regarding minimum wage, overtime, breaks, workers’ compensation, etc. To avoid legal problems and make sure employees are treated fairly, you need to understand these laws.

Calculating Employee Compensation

payroll compensation

A lot goes into calculating employee compensation, from determining gross pay based on employee type to withholding taxes and benefits to calculating final net pay.

3. Calculating Gross Pay

Calculating gross pay accurately is fundamental to the payroll process. Different methods apply to different kinds of employees:

Hourly employees: You calculate your gross pay by multiplying your hourly rate by the number of hours you worked, plus any overtime or vacation deductions.

Salaried employees: Salary workers divide their annual salary by the number of pay periods.

Commission employees: The calculation involves combining a base pay (hourly or salaried) with commission earnings as determined by the commission structure of the employer.

4. Determining Tax Withholding

Withholding tax is a crucial component and depends on information from employees:

Federal, state, and local income taxes: During onboarding, employees fill out federal, state, and local tax forms.

FICA (Social Security and Medicare taxes): In compliance with federal law, payroll deductions include FICA taxes for Social Security and Medicare.

Benefit deductions: Depending on your benefit plan, you’ll be able to deduct healthcare, retirement, and flexible spending accounts.

Different Types of Payroll Taxes: As well as employee withholding, employers have their own payroll taxes to pay, including Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUI). FUTA is a federal tax that supports unemployment benefits, while SUI is a state-specific tax.

After you’ve read the article, go back and locate your state in the following list. Click on “Taxation” to check your state’s tax laws.

5. Calculating Net Pay

Essentially, net pay is what you get after taxes and deductions. A net pay calculation subtracts the total amount withheld from gross pay. Employees receive it on payday, so they know how much they earned.

It’s important to calculate net pay accurately so employees get paid fairly and meet tax obligations.

Here are the general steps to calculate your Net Income:

You can determine your taxable income by deducting any pre-tax contributions you may have made to your benefits account.
Make sure all applicable taxes (federal, state, and local) are withheld from your paycheck.
If you make any post-tax contributions to your benefit plan, you can deduct them.
In the event that wage garnishment is necessary, garnish the wages.
As a result, we are left with net income.

Payroll Distribution

The last step in payroll is distributing employee earnings, where businesses must decide between direct deposit or physical checks, all while being aware of the legal consequences of late payments.

6. Paying Employees on Payday

Business owners have two options for distributing salaries on payday.

Direct deposit: Transferring funds electronically to an employee’s bank account is a modern and convenient method.

Physical checks: Traditional paper checks handed out to employees.

Depending on your location, late payments may have legal consequences. Often, fines and penalties can be imposed if you pay employees late.

For instance, California fines businesses $100 per late payment, so it’s important to pay employees on time and show respect for their financial stability.

Managing Employee Payroll Records

Maintaining employee payroll records is an important part of payroll management, as it ensures compliance and transparency while protecting against audits.

7. Maintaining Compliance

As a small business, you must keep meticulous payroll records to comply with legal requirements:

Legal Requirement: Nonexempt employees who are entitled to minimum wage and overtime pay have their payroll records kept for three years under the Fair Labor Standards Act (FLSA).

Included Information: Payroll records should include info like pay rates, hours worked, overtime calculations, vacation pay, and tax withholdings.

Duration of Record Retention: To ensure compliance with potential audits or inquiries, keep records for a longer period than three years.

Businesses that keep comprehensive and organized payroll records not only comply with their legal obligations, but also ensure transparency and accuracy in their operations, enabling them to deal with employee questions and regulatory assessments efficiently.

Feeling overwhelmed when having too many documents opened on multiple platforms? Centralize your payroll using one software that will become your single source of truth.

How To Pay Employees FAQ