What Is Payroll? (+How to Do It Yourself)

Michael Gigante
Michael Gigante  |  March 11, 2019

Whether you’re a small business or a large enterprise, a streamlined payroll process is crucial to keeping your employees happy and your finances in order.

From using payroll software all the way to outsourcing, your company can determine which payroll option best fits your business needs. 

What is payroll?

So what is payroll, exactly?

HR departments also refer to “running payroll” as the process of calculating the payments that you owe each employee. Companies will often run payroll on a weekly, semimonthly, or monthly basis.


How to do payroll

Processing payroll can be done in three different ways:

  1. Do payroll yourself

  2. Use a payroll software

  3. Use a payroll service

Understanding the steps in each option as well as the pros and cons will help your company decide which payroll option best fits your business needs. 

TIP: Learn how to use payroll to cover negative cash flow.

How to do payroll yourself

Manual processing enables companies to do payroll themselves. This option is smart for smaller businesses that are just starting out and may have limited funds. If you’re trying to figure out how to process payroll yourself, it will be helpful to follow the steps below: 

1. Obtain an Employee Identification Number  

Before you begin to run payroll for your company you must obtain an employer identification number (EIN). An EIN allows your company to identify as a business so you can pay your employees. You can apply for an employee identification number on the IRS website.

2. Have employees fill out a W-4 form

W-4 forms let employers know how much money to withhold from each paycheck for tax purposes. This is a single form that new employees should fill out before starting work at your company. New employees must fill out a W-4 before receiving their first paycheck. (Here’s an official W-4 form for 2019.)

3. Establish a payroll schedule  

Companies can choose to pay their workers weekly, bimonthly, or monthly. Establishing pay dates is important so you can then schedule tax payments and tax filing deadlines.

4. Calculate income taxes  

To avoid government audits, you need to accurately calculate the federal and state income taxes to subtract from your employees’ paychecks. Find your states taxes here.

5. File annual W-2 forms  

Having employees file W-2 forms helps the IRS determine how much money was withheld from each employee so they can collect tax rebates. You must submit this file once a year to the IRS.


Payroll software

If you’d like to run payroll in house without the manual labor, using payroll software might be the best move for your business. Some steps from the competing payroll by yourself process must also be completed before using payroll software. Here are the steps to complete payroll using payroll software:

1) Choose a payroll software

In order to choose the payroll software that will work best for your company it will be useful to choose a software that correlates with the size of your business. Then depending on if you are a small, mid-size or large company you can choose a small business, mid-size or enterprise payroll software. When searching for software, it is also beneficial to consider the specific features your company might need.

2) Enter business information

Once you’ve chosen a payroll software that fits your company’s needs, you will enter your business and employee information. This includes your employee identification number and company W-4 forms.

3) Have employees track their time

Before your employees get paid, they must enter the hours they’ve worked. They can do this using time and attendance software or workforce management software.

Find the best Time Attendance Software on the market. Explore Now, Free →

4) Run company payroll

Once employees have entered their work hours, payroll administrators or managers should review that the work hours are accurate and then approve their pay. This will automate the payroll to run on the scheduled date.

5) Calculate employee taxes

The last step is to file your company taxes. If you choose to go with a full-service payroll software, it will calculate your company taxes automatically.

Payroll software being used to enter employee's hourly rates and time workedImage courtesy of Patriot Software


Payroll services

If your company does not want to run payroll in house, you can outsource to a payroll service. There are two types of payroll services:

  1. Assisted payroll services

  2. Self-service payroll services

Assisted payroll services

Assisted payrolls services complete most to all of your company payroll for you. These services can calculate employee pay, make payments and generate tax forms such as W-2s.

Payroll services handle all employee taxes, saving companies filing time. If your company has employees in multiple states, keeping track of multiple local and state taxes is difficult. Assisted payroll services can help with tasks like these.

Once you opt for an assisted service, there aren’t many steps left for you. You will be assigned a payroll specialist that will handle your payroll.

The major advantage of an assisted payroll service is that payroll is always completed on time. Assisted payroll services ensure your company never misses a payment or forgets to file taxes, both of which can incur major penalties.

Self-service payroll services

In contrast to assisted payroll services, self-service payroll puts the payroll responsibility in the hands of the company.

The steps for completing self-service payroll are to that of the payroll software steps.

Self-service payroll services allow your company to run payroll 24/7. They also let employees edit personal details, change their tax withholding, enter hours worked, view important benefit options and access their payroll history.

Self-service payroll generally charges companies based on the number of employees that they have. This can help if you’re a small business with only a few employees.

The major advantage of choosing a self-service payroll option is that it puts a lot of agency on the employees. They can enter their own hours, view their withholdings and enroll for company benefits.

The disadvantage is that every employee must learn how to use the system. This means training every new employee which can take a good amount of time.


Takeaways

There are plenty of different payroll options to choose from. Some options put more responsibility on your employees but are less expensive while some outsource the entire process to services but it costs more money. The goal is finding the option that best suits your company.

Ready to choose a payroll software for your company? Check out our best free payroll software for 2019.

Michael Gigante
Author

Michael Gigante

Mike is a Research Associate who started at G2 Crowd in October 2018 after a year of teaching English in Thailand. He is a Chicago native, and In his spare time he enjoys going to comedy shows, watching sports, and reading wikipedia pages on virtually any subject.