If it’s your first time running payroll for your business, it can seem daunting to figure out all the steps to take. It’s easy to say that payroll simply means withholding taxes and paying your employees, but there are some additional things to think about to make sure you set yourself up for success. Here are six steps you need to follow to run payroll successfully. 

Step 1: Register for your tax IDs 

Running payroll successfully is all about a good foundation. Set yourself up for success by getting your necessary tax IDs and policies ready before you run payroll. 

The tax IDs you need to know about are:

  • Federal Employer Identification Number (FEIN or EIN) 
    • Issued by the IRS
    • Used to pay federal taxes
  • State Revenue ID
    • Issued by the state(s) where your employees are working
    • Used to pay state income tax
      • May not be relevant if you operate in one of the nine states that don’t not have this tax
  • State Unemployment ID
    • Issued by the state(s) where your employees are working
    • Used to pay state unemployment tax
    • New employers may have to run a certain amount of payroll before they can be assigned an account number
    • New employers typically have a new employer tax rate, but experienced employers can see their rate change annually

Step 2: Decide on payroll policies 

The payroll policies and procedures you should decide on are:

  • Payroll schedule
    • When and how you will pay your employees
    • Document this in your employee handbook 
  • Payroll provider
    • Your options include doing it manually, using an online provider, or using a bookkeeper
  • Payroll administrator
    • You or the person on your team who will be running payroll
    • Give them the necessary access to sensitive documents and info they will need to process payroll

Step 3: Gather hours, overtime, and time off

If you have hourly employees this will be an important step to complete before you can process payroll. 

Some tips to remember:

  • Make sure you gather hours for the exact pay period you are processing
  • Note any instances of overtime or double overtime

Gathering time off can be an easy step to forget, but it is important to do so you can ensure your payroll run is correct and your employees’ time off balances stay up-to-date. 

Types of time off to look out for:

  • Sick time
    • Paid or unpaid, though some states and cities have requirements about accruing and using paid sick time
  • Vacation time 
    • Paid or unpaid vacation
  • Holiday time
    • Paid holidays

Step 4: Calculate and withhold taxes

This is the meat of the payroll run. It’s time to calculate, withhold, and remit tax payments for your and your employees.

Employer-paid taxes

  • FICA
    • Social security is 6.2%
    • Medicare is 1.45%
  • FUTA
    • Typically 0.6% on the first $7,000 of wages paid in the year
  • SUI
    • Rate is assigned by the state

Employee-paid taxes

  • Income tax
    • Federal and state income tax (where applicable) vary based on earnings and withholding allowances
  • FICA
    • Social security is 6.2%
    • Medicare is 1.45%

Bonus: Make sure to withhold benefit contributions (like health insurance and 401(k)s) and garnishments, when applicable. Get those payments to the right place on time as well.

Step 5: Create and distribute pay stubs

Once you have figured out what taxes you need to withhold, you can calculate your employees’ net pay. When creating a pay stub, here is some key info to include: 

  • Gross pay
  • Net pay
  • Taxes withheld
  • Benefit deductions and contributions
  • Time off used, time off accrued, and current PTO balance

When distributing pay stubs, it’s a good idea to always do it at the same time as you distribute earnings on pay day. Check with your state to see if there are any rules for what you must include on a pay stub or when/how you must give it to employees.

Step 6: Initiate direct deposits or write checks

This is the part of the payroll run that your employees are probably looking forward to the most. If you are paying employees by direct deposit, make sure you process payments at least four business days in advance, so it can move through the ACH system.

When writing and mailing checks, make sure to do them in advance so they arrive on time. If you are handing out checks in person, make sure you have them ready to go on pay day.

Need help with these steps? Homebase Payroll automates the process so you can pay your team in a matter of clicks. We’ll instantly convert your timesheets and calculate wages before sending the correct payments to both your employees and the IRS.