Know What Payroll Involves

Put simply, payroll is the process by which your employees receive their wages. But it’s also much more than that: It’s how you demonstrate your commitment to your people, fulfill your obligations to the government and keep your financial records in order, providing the peace of mind you need to grow your business.


Whether you decide to outsource the job, hire a full-time bookkeeper or simply do it yourself, there are some basic aspects of payroll you should familiarize yourself with before getting started.

A Payment Schedule

One of the first payroll decisions you get to make is how often to pay your employees. Generally, there are four standard options:

  • Weekly (Every week/52 paychecks per year)

  • Biweekly (Every two weeks/26 paychecks per year)

  • Semi-monthly (15th and 30th of every month/24 paychecks per year)

  • Monthly (Once a month/12 paychecks per year)

The first thing to know is your state’s legal requirement. Some states require at least bimonthly payments for all workers, while others require specific frequencies for different types of workers. You can find that information on this full list of state requirements.


Otherwise, if you are not bound by state rules or contractual obligations - you are generally free to choose whichever pay period works best for you. Your choice will not affect how much your employees get paid or how much they (or you) will owe in taxes. But running payroll more frequently will mean more work for your business, while running it less frequently will require your workers to stretch their paychecks further. It’s important to strike a balance.


An Employee Identification Number

An Employee Identification Number (EIN) — also known as Federal Employee Identification Number or a Federal Identification Number — is a nine-digit number (format: 00-0000000) the IRS uses to track your company for tax purposes. Think of it as a Social Security number for your business. It can also be used to open business checking accounts, apply for various licenses and establish accounts with vendors. Visit the IRS Web site to apply for your own EIN.


Some state and local governments also require businesses to have a separate tax ID number. If you’re running payroll manually, be sure to contact any municipality in which you have employees to learn more.

The W-4 & The W-9

There are two forms that the IRS uses to calculate the tax liability for employees. You must have all full-time employees fill out a Form W-4 and all independent contractors fill out a Form W-9. You aren’t required to withhold any taxes for independent contractors but you will need to file Form 1099 at the end of each calendar year that reports how much you paid them. (Bona fide employees receive a Form W-2.) Not sure if your workers count as employees or independent contractors? Visit our section on Worker Classification.

A Compliant Pay Statement

Some states require very specific payroll items to be displayed on an employee’s pay statement, and there are even state-specific requirements for access to electronic pay statements. Avoid pay stub violations by contacting the labor departments in the states in which you have employees. They will outline the requirements.

A Payroll Manager

Regardless of how you choose to process payroll, every business needs someone to manage it. That person could be the office manager, the HR director, even the owner. Just how much time the job requires depends on which processing option you choose, but at a minimum this person will be responsible for:

  • Tracking employee hours and paid time off

  • Collecting Form W-4 from employees and Forms 1099 from independent contractors

  • Approving changes to employee exemptions and permissible deductions

  • Reviewing payroll reports

  • Remitting payroll taxes

  • Ensuring accuracy of regular and overtime rates

A Method for Tracking Time & Attendance

If you have non-exempt employees, you will need a method for tracking the hours they work – including overtime - so you can pay them accurately. (You can learn more about federal overtime requirements by clicking here, and state overtime laws are found here). And of course, you will need to keep track of paid time off, like vacation days, parental leave and sick days.


How you choose to track time and attendance — a time clock, a mobile app, a pencil and paper—is entirely up to you. But bear in mind that doing it manually means transferring those numbers into a payroll calculator by hand, which opens the door to human error. Companies that choose an automated time and attendance solution that integrates with payroll are 30% less likely to commit payroll mistakes.1

1. Total Workforce Management 2013: The State of Time and Attendance, Aberdeen Group, July 2013.

Payroll Taxes

As an employer, you are responsible for calculating and withholding a certain amount of money for federal, state and local taxes from every employee paycheck. How much you must withhold is determined by the employee’s Form W-4 and current tax rates.


Employers are required to match two of the federal taxes paid by employees, Social Security and Medicare. And they are solely responsible for paying taxes under the Federal Unemployment Tax Act (FUTA), which are assessed through Form 941.


Each state and many local governments have their own tax requirements, too. ADP maintains a list of payroll tax requirements by state.


Once your employees have filled out their Forms W-4, you are responsible for calculating their tax liability for each pay period and sending it to the proper government agency. In addition, you must withhold any court-ordered garnishments, such as child support or alimony. Employees can choose to have you withhold other deductions (retirement funds, insurance premiums), each of which will require their own consent forms.

Now that you know what payroll involves, click below to learn about your Payroll Options.

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