Know What Payroll Involves

Intro to payroll

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 (options we will explore in Chapter 2), 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. 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 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, you are 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.


You can also choose between paying “current” or “in arears.”

  • Paying “current” means issuing payments for the week that just ended (e.g., issuing checks on Friday for the work that began Monday). This requires you to prepare your employees’ payments before they actually perform the work, and may require you to make adjustments in future payments.
  • Paying “In arears” means waiting one week till after the work is performed before issuing payments (e.g., issuing checks on Friday for the workweek that concluded the previous Friday). This reduces the employer’s risk of losing money to employees who don’t work all their expected hours.

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 W4 and the W9

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 W-4 and all freelancers fill out a W-9. You aren’t required to withhold any taxes for freelancers, but you will need to file form 1099 at the end of each calendar year that reports how much you paid them. (Full-timer workers receive a W2.) Not sure if your workers count as full-time employees or freelancers? Visit our section on Worker Classification.


Form 940

Any business with employees must file an annual Form 940 to report taxes paid under the Federal Unemployment Tax Act. This is a tax paid by the employer—not the employee—to provide unemployment payments to workers who have lost their jobs.


Form 941

Most businesses are required to file a Form 941 to the IRS at the end of each quarter to report how much they have paid in taxes for that period. Every 941 must report the number of employees you have, the total wages you paid, and how much you withheld for taxes. Some specialized businesses have to file different quarterly forms.

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 minimum this person will be responsible for:

  • Tracking employee hours and paid time off
  • Collecting W-4s from employees and 1099s from freelancers
  • Approving changes to employee exemptions and deductions
  • Reviewing payroll reports
  • Remitting payroll taxes  

A Method for Tracking Time and Attendance

If you have part-time or hourly employees, you will need a method for tracking the hours they work so you can pay them accurately. You will also need to track the hours of full-time employees that are entitled to overtime (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

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 W4 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 FUTA (Federal Unemployment Tax Act), which is assessed by 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 W-4s, 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.

How Do You Want to Pay Your Employees?

Physical checks can be handwritten or printed and require only that your business have a checking account with a bank.

Provides a paper trail and doesn’t require employees to have a bank account.


They must be hand-delivered or mailed.

Electronically transferring funds from your company’s account to your employee’s account has become the preferred method.

Funds are transferred instantly, minimizing wait times for employees.


Employees must have a bank account.

This relatively new option allows employers to pay workers in the form of pre-paid debit cards rather than checks or direct deposit.

Workers get immediate access to their funds without needing traditional bank accounts.


Cards are easily lost or stolen, and workers who need cash will be subject to ATM fees.

When it comes to how you will process payroll, you also have a wide spectrum of options to choose from, learn what they are in our next chapter!