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Workforce Management

How to Process Payroll

The best way to process payroll is to not process payroll. Your HR & Payroll provider should do that for you. The truth is payroll is too time intensive and complicated (especially if your business has locations in more than one state). Payroll compliance can get tricky too if you don’t have an expert keeping track of every new rule and regulation.

The good news is, payroll software can help businesses automate much of the process, prevent compliance headaches and ensure you don’t pay employees incorrectly.

Whether you are struggling to do it all yourself or have a payroll provide like Paycor take care of most of the work for you, it’s good to know all the steps that go into process payroll. Let’s walk through them.

(If you are ever confused about any of the terms used, check out our handy payroll glossary.)

Before You Can Process Payroll

If you have employees, you have to pay them—and that means you need to process payroll. Doing it all yourself manually is possible, in theory, but takes time and small errors can have big consequences.

Either way, you’ll need an Employer Identification Number or EIN, also known as a Taxpayer ID Number. Here’s how to apply. You will also need a State/Local Tax ID Number and, in most cases, a State Unemployment ID number.

Choose Your Pay Schedule

The first step is decide how often you’ll pay your employees: weekly, bi-weekly or monthly? It’s not entirely up to you; most states have certain requirements of pay schedules. This is a decision you want to get right, because changing pay periods can cause disruption. And beware—costs associated with payroll process mean that the more often you process, the more you pay.

How Paycor Helps:

Whatever schedule you choose, Paycor streamlines the process, saving you valuable time. You can also set up future payruns in advance, rather than having to start from stratch every pay cycle.

payroll software screen on laptop

To help your decision, here are 10 things to know about pay periods.

Set up Organizational Structure

Whether you process payroll manually or using software, you need to understand your organization, especially on the financial side. Most importantly, this means you need to set up general ledger accounts to keep track of exactly where your money is going and why.

Next, you need to organize your company on a department-by-department basis. This is especially important if you operate in multiple cities and across state lines, where employees will be subject to different taxes and withholding requirements.

You’ll also want to set out earning codes specifying how pay rates vary in different circumstances.

In addition to pay, setting up your organizational structure means you need to list all deductions, like for benefits plans and 401(k) contributions.

The final building block of your company structure is to list all taxes and withholdings, from local to federal level. Any tax credits should also be included.

How Paycor Helps:

This is complicated stuff and you really don’t want to get any of this wrong—that’s why Paycor sets it all up for clients during implementation. Clients can also select from a pre-built list of earnings codes, deductions and taxes, rather than having to create their own from scratch.

Add (and Maintain) Employee Pay Information

Once you’ve got your organization structure sorted, it’s time to set up payroll at an employee level.

The first step is to set employee pay rates. A basic rate of compensation will likely be selected from a range of pay bands, appropriate to different levels of seniority and experience.

You’ll also need to calculate employee benefits and deductions, like 401(k) deductions and any insurance contributions.

Lastly, you need to calculate all employee taxes and withholdings. This includes federal income tax and federal unemployment tax to state and local tax and more.

How Paycor Helps:

This is important but, again, it’s only a concern if you’re processing payroll manually. With Paycor,this will also be taken care of during implementation, and when it comes to payroll all deductions, taxes and witholdings will be calculated automatically, saving you time and keeping you compliant.

Collect (and Double Check) Employee Information

Here are the relelant employee documents you need to process payroll:

  • W-4
  • Applicable state withholding certificates (in addition to the federal W-4)
  • W-9 (for independent contractors)
  • I-9
  • Employee addresses
  • Social Security Numbers (SSNs)
  • Bank information (if using direct deposit)
  • Workers’ Compensation ID Number (in certain states)
  • Medical insurance forms
  • Retirement plan documents

Businesses planning to process payroll manually should also consult the IRS’s Publication 15 (Circular E) for all tax responsibilities.

How Paycor Helps:

Paycor is also an HR Information System (HRIS), so there’s no need for clients to collect all these documents themselves—all the required information will already be stored on the system.

Calculate Employee Hours

Everything detailed so far is ‘set and forget’—that means you don’t need to repeat it for each and every pay period. And if you are using a payroll provider, you had most of it set up for you anyway.

Now we’ll move on to what you need to do every time you run payroll, of which the most variable element will likely be the number of hours worked. You’ll need to know this to begin your payroll processing.

How Paycor Helps:

If you use our time & attendance software, you’ll avoid having to manually calculate employee hours. Instead, simply import timesheets, you’re all set.

This is also an opportunity to make necessary changes to an employee’s earnings for this pay period. This means editing employee hours, configure earnings and deductions, or make one-time additions like bonuses, commissions or expense reimbursements.

You may also want to make one-time changes to an employee’s deductions. These changes will revert back for the next payroll. For example, if an employee needs some extra cash, they may request that their 401(k) contribution rate be temporarily reduced.

running employee payroll screenshotReview Your Payrun

Almost there! It’s time to begin your payrun. If you’re doing it manually, you have to cross your fingers and hope your sums are correct.

The most important numbers to know are employees’ net pay (their gross pay minus all necessary deductions, taxes and withholdings) and company total cash requirements (cash requirement, employee tax liability and employer tax liability).

How Paycor Helps:

Using a payroll provider like Paycor means you don’t need to worry about getting the sums wrong. The tough caluclations are all automated and you can also set limits so you’ll be alerted if you accidentally keyed in an extra ‘0’ at any point.

It’s still good practice to check the top line figures before running payroll, so we provide all the data you need in one helpful dashboard.

payroll processing dashboard on computerRun Reports

For a deeper dive into your company’s financials, a brief overview won’t be enough—you’ll want reports. Unfortunately, if you’re doing payroll manually, creating these is a laborious process.

How Paycor Helps:

Paycor offers a variety of instant reports for those who want to dig deep into the numbers and make sure that every detail is correct. The following reports are available at the click of a button:

    • Net cash totals
    • Employee Tax Withholding totals (covering social security, medicare, and federal, state and local taxes)
    • Employer Tax Liability Totals (covering social security, Medicare, Cobra premium assistance, federal unemployment, state unemployment, worker’s compensation and local liability)
    • Paygroup totals
    • Pre-Post Payroll Journal
    • Additional Pre-Post Reports (on labor distribution, cash requirement, deductions not taken, unpaid employees and payrun export audit)

Deliver Pay (and Withholding)

Now it’s time to put the ‘pay’ in payroll. You need to print and mail checks or send direct deposits, pay and file taxes, and withhold any necessary sums.

Note, banks need 48 hours to complete direct deposits so you’ll want to process payruns at least 2 business days in advance of the check date. Lastly, some states require employees be given a physical pay stub.

How Paycor Helps:

All Paycor customers need to do is hit ‘submit’ and the rest is taken of. We offer full-page pay stubs, automatic mailing and a garnishment processing service.

Maintain Records

You’re not done yet! You may have processed payroll successfully, but you need to be able to prove it. The Department of Labor (DOL) requires you track all payroll information, including weekly hours, earned overtime and employee wages. You should also be aware of state labor laws.

How Paycor Helps:

Paycor stores all the payroll details you need to stays compliant. If you want to export this for your accounting system, simply download a formatted general ledger file.

Paycor is Here for You

Paycor builds HR software for leaders of medium & small business. For 30 years, we’ve been listening to and partnering with leaders, so we know what they need: HCM technology that saves time, powerful analytics and expert HR advice to help them solve problems and achieve their goals.