How to Do Payroll: A Guide to Running Payroll in the Midst of COVID-19

This guest post comes from Paychex, a provider of human capital management solutions for payroll, HR, retirement and insurance services. Visit Paychex’s COVID-19 Help Center for additional articles and webinars on these topics.

 

Running payroll is an essential part of operating any business that has employees. But it doesn’t come without its challenges, especially since businesses are rethinking how they operate during and after the COVID-19 pandemic. And the more employees you have, generally the more complicated the process can become. Like many business decisions, there are several options when it comes to running payroll, one of which includes outsourcing the process.

 

A recent Paychex poll* of payroll users found that 39% of businesses do payroll manually, and just 17% of respondents would consider changing from a manual to an outsourced solution. Taking the pandemic into consideration, those doing payroll manually who are looking to apply for a Paycheck Protection Program (PPP) loan must take the time to gather and calculate specific payroll costs.

 

So what does it take to do payroll on your own? And what are your options if you’re looking for help?

 

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Can you do payroll yourself?

Once you have employees working for you, you need to pay them and handle applicable taxes each pay period. These and other responsibilities make up doing payroll, which you or another staff member such as a bookkeeper can do — whether it’s manually, using software or another avenue. Depending on the method, take in factors such as how much control or oversight you want to have, cost considerations, and time commitments, among others.

 

How to do payroll manually

If you choose to do payroll on your own, there are many pieces of information you need to gather first. When understanding how to do payroll yourself, take time to learn the details of the following:

 

Correctly classify your workers

Employers must identify if the worker is considered an employee or an independent contractor, since each classification falls under different rules. If you misclassify an employee as an independent contractor, you may be held responsible for paying back employment taxes for that worker, as well as back pay and overtime.

 

Understand different types of pay

It’s also necessary to calculate the correct taxes on an employee’s wages, including overtime, vacation and sick pay, and if applicable, commissions, bonuses and benefits, as well as workers’ compensation. When familiarizing yourself with employee pay, some common payroll terms include:

 

Gross pay

This is the amount an employer might pay on an hourly or weekly basis. Gross pay is the amount that employees receive before deductions.

 

Net pay

This is the amount an employee takes home, after deductions.

 

Bonus pay

Bonus pay refers to additional compensation provided as a reward for high performance. Both cash and non-cash bonuses are subject to income tax withholding and other payroll taxes.

 

Calculate employee wages

There are many calculations and determinations that go into determining an employee’s wages. As mentioned above, one of the key parts of calculating pay is deducting payroll taxes from employee paychecks. In addition, you will need to do the following:

 

Determine your business’s payroll schedule

A payroll schedule establishes employee pay dates, tax payment due dates and tax return filing deadlines, etc. You’ll also want to account for scheduling special payrolls, such as for seasonal or annual bonuses.

 

Calculate gross wages

There are many calculations and determinations that go into determining an employee’s wages. As mentioned above, one of the key parts of calculating pay is deducting payroll taxes from employee paychecks. In addition, you will need to do the following:

 

Determine your business’s payroll schedule

A payroll schedule establishes employee pay dates, tax payment due dates and tax return filing deadlines, etc. You’ll also want to account for scheduling special payrolls, such as for seasonal or annual bonuses.

 

If an employee is only paid hourly wages and has not worked more than 40 hours in a workweek, gross wages are calculated manually by multiplying the employee’s hourly rate by the number of hours worked in the pay period. Calculations become more complex when multiple wage rates or additional earning types (bonuses and commissions) are also paid.

 

If you’ve determined that a salaried employee is exempt from overtime compensation under the applicable federal and state laws, calculate their gross wages by dividing their annual salary by the total number of pay periods in a year. For example, an employee with a salary of $75,000 who is paid biweekly receives 26 paychecks a year (but may receive 27 in some years). Divide $75,000 by 26 to calculate their biweekly salary of $2,884. Some employers simplify this by stating an exempt employee’s salary per week or pay period at hire so there is no need to perform this calculation.

 

Account for overtime pay

Employees classified as non-exempt under the Fair Labor Standards Act (FLSA) are generally eligible for overtime pay at a rate of 1.5 times the employee’s regular rate of pay for all hours worked over 40 in a workweek. You must also check applicable state laws for overtime rules, which may differ from federal law.

 

Handle deductions

Deductions refer to any amount an employer withholds from an employee’s paycheck for federal, state and/or local taxes as well as employee benefits. A few examples of common deductions include the following:

 

Payroll taxes

Employers generally have to withhold federal and state income tax from all employees’ wages, based on what employees enter on their Form W-4 and, if applicable, state withholding form. Here’s a brief explanation of a few (but not all) mandatory payroll taxes:

 

Federal income tax

This is withheld from an employee’s wages or salary, reported to the federal government and applied to the employee’s calculated tax liability at the end of the year.

 

State income tax

Most states require employers to withhold state income tax from employees’ paychecks. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax. New Hampshire and Tennessee (through 2020) do not tax wages. Some cities, such as New York City and Philadelphia, also have income taxes, which means additional wage withholding.

 

Social Security and Medicare taxes

This tax is generally paid equally by the employer and employee to fund these entitlement programs.

 

Federal Unemployment tax

This is paid to provide funds for paying unemployment compensation to workers who lost their jobs.

 

There is also the state unemployment (SUI) tax that subject employers must pay. Except for a few states, state unemployment taxes are not deducted from an employee’s wages.

 

Benefits contributions

Benefit contributions can include workplace-sponsored retirement plans, health, life, or disability coverage and flexible spending accounts. In such cases, you’ll need to calculate and deduct each employee’s individual contributions from each paycheck.

 

Wage garnishments

A wage garnishment is any legal or equitable procedure where some portion of a person’s earnings must be withheld by law by an employer for the payment of a debt such as alimony, child support or student loan default. An employee’s pay may be subject to additional voluntary deductions as well.

 

Payroll processing basics

Paying mandated taxes on a regular schedule through your payroll is key to avoiding penalties. And remember: on-time, accurate paychecks – in addition to being required by law – are correlated to worker morale and a solid business reputation. Some basics to keep in mind when processing payroll include:

 

  • Collecting and tallying the hours worked by each employee
  • Calculating the wages and overtime
  • Paying the right amount, including double-checking all employee information, tax withholding amounts, and payment information
  • Processing payroll on time every pay period
  • Paying attention to bank holidays, which are holidays when your bank closes, and adjusting your payroll processing timelines accordingly
  • Depositing and reporting employment taxes correctly to all federal, state and local tax authorities
  • Printing and signing paychecks, as well as administering direct deposit for employees who opt for this payment method

Is doing payroll yourself worth it?

Given its complex nature, processing payroll on your own can cost more in the long run than what you may save initially. A 2017 Paychex survey found that one-third of small businesses spend around $1,001 to $5,000 each year on annual administrative costs by doing payroll themselves. Another third of companies spend more than $5,000 a year, with some companies reaching expenses as high as $40,000 or more.

 

Time is an additional factor when considering whether to do payroll yourself. Another Paychex survey found that HR professionals spent an average of 11 hours each week on payroll — equating to a full day and a half every week with an office that has a typical eight-hour workday. Recognizing this, 30% said that processing payroll was the top function for which respondents wished they had better systems and technology in place.

 

On top of it all, business owners continuing to manage through the COVID-19 pandemic may be spread thin now more than ever. Many facets of the business may need immediate attention (navigating reopening, implementing enhanced safety measures, evaluating business insurance policies, etc.). Taking the time to complete payroll each pay period may be an additional item on your to-do list that you don’t have the time or energy for, especially right now.

 

Options for managing payroll

While business owners who are just getting their ventures off the ground or who are used to being hands-on with all areas of the business may be most familiar or comfortable with doing payroll themselves, there are many options for managing payroll they may want to consider.

 

In-house manual calculations

As previously mentioned, in-house payroll means that payroll tasks are completed via manual bookkeeping. A business owner can take on this task themselves or bring on an employee to take care of payroll and the associated tasks that come with it. While this payroll method offers maximum control over the process, it can often be time-consuming and errors can happen. Just one payroll error can result in penalties.

 

Using a payroll provider (outsourcing)

This option refers to using the resources and expertise of a professional payroll provider. You could gain time savings, mitigated risk, payroll expertise, and other benefits by using such a service. But there are cost considerations to factor in, as well as your comfort level of handing off these responsibilities to a third party. Just know that there are solutions that let you decide how involved you want to be: stay completely hands-off, do a big chunk of the work yourself or somewhere in between.

 

PEO

A professional employer organization (PEO) brings employees into a larger benefits and administrative service group. It allows you to manage day-to-day business while gaining access to payroll as well as employee benefits and HR expertise that your business might not otherwise be able to afford. This method takes many payroll responsibilities off your plate; depending on how much control you’re looking to have, this could be a significant factor in your decision-making process.

 

Payroll software

You can purchase software to help you or a designated staff member make calculations and complete payroll tasks. There are many options on the market, many of which are relatively inexpensive, and this option allows you to still be in control of the payroll process while increasing your chances of making accurate payroll calculations. However, there may be limited or no support available with payroll software if you have questions or encounter any discrepancies. This could be an important factor for business owners or individuals who have no previous experience with running payroll.

 

Hiring a CPA

A certified public accountant has extensive knowledge on payroll and taxes, and can use this knowledge to help businesses owners who want to hand off these tasks. A CPA generally will do payroll manually or use payroll software (see above) to complete payroll tasks. Keep in mind that if you go this route, there is a cost you’ll incur for paying someone else to handle payroll.

 

Next steps for how to run payroll

There are many considerations when thinking about paying employees, particularly as businesses plan how they will recover from the COVID-19 pandemic. And like any other business decision, it’s important to consider your options, the time and resources involved, and your business goals. One last important point: there isn’t much flexibility when it comes to payroll. Payment rates are agreed upon hire, time worked is normally hours that you schedule, calculations are mandated by laws and regulations and withholdings and tax rates are mandated by government agencies. What you can control is the method by which you do payroll so that it’s beneficial for you and your business.

 

The views and opinions expressed in this post are those of the author (Paychex) and do not necessarily reflect the official policy or position of Indeed.

 

*Paychex conducted four separate online surveys of 300 principals of U.S.-based businesses with 2 to 500 employees. Wave 1 was fielded April 17-20; Wave 2, April 24-27; Wave 3, May 1-4; Wave 4, May 15-17. Each survey has a +/-5.66% margin of error.

 

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