Are you proud of your business? If you’re a small business owner, your company is probably the result of a dream that became a reality. You’ve poured so much time, passion, and hard work into building your business and you deserve to enjoy success without the hassle.
But if you’ve ever slogged through the task of manual payroll processing, you know that payroll — like so many other admin aspects associated with your business — is nothing but stress. With so many tax obligations, employment regulations, and potential payroll penalties to be aware of, it’s a lot to keep up with on your own!
That’s why we’ve created a comprehensive payroll checklist that will help you keep track of your payroll processing requirements, conduct a payroll audit, and implement the best payroll software in your workplace.
What Is Payroll?
No matter what industry you work in, payroll is an essential aspect of your business. Your workers are the backbone of your organization and — unless you’re staffed entirely by volunteers — no company can survive without paying its employees. So, payroll is an absolute necessity, but how does it work in practice?
Put simply, payroll refers to the process of paying employees for their work, which includes calculating and disbursing salaries, wages, and other compensation. It involves a series of tasks such as calculating gross pay, deducting taxes and other withholdings, processing benefits and other deductions, and distributing payments to employees.
Payroll processing is typically a regular, recurring task that is performed weekly, bi-weekly, or monthly, depending on the pay schedule of the company. In addition to guaranteeing that employees are paid accurately and on time, payroll helps to maintain compliance with various tax laws and regulations.
What Is a Payroll Checklist?
Whether you process your payroll manually or use an automated payroll processing platform, a payroll checklist can help you keep track of all the essential steps in the payroll process. A payroll checklist typically includes a list of tasks that need to be completed, along with deadlines and other important information.
Depending on the industry you work in and the type of business you run, your customized checklist may look slightly different from those used by other businesses. But, as a general rule, a payroll checklist should include the information below.
Example Payroll Processing Checklist
Processing payroll is a multi-step process that requires you to keep track of lots of little details. That’s why having a payroll checklist is especially important — to ensure nothing slips through the cracks.
Step 1: Verify employee information
It makes sense that, to process your payroll, you have to verify employee information. But what information do you really need? This may get a little more complex if your business has additional security requirements but, at a minimum, every business needs a few core pieces of information.
So, make sure you have each employee’s accurate and legal name, address, contact info, and social security number. Verifying this before you process payroll will help you ensure that everyone’s information is correct and that you’re complying with federal, state, and local employability laws.
Step 2: Record time and attendance
You can’t process payroll without an accurate record of your employees’ time and attendance. So, recording time and attendance is a crucial part of any payroll checklist.
- Calculate overtime pay
Are any of your employees entitled to overtime pay? If they are, you definitely don’t want to forget that when you’re processing payroll! This can get tricky if you’re processing payroll manually, however, so here’s a little calculation guide to help.
Overtime pay is calculated based on the hours an employee works beyond their normal workweek or workday. In the United States, federal law requires employers to pay employees at a rate of 1.5 times their regular rate of pay for any hours worked over 40 hours in a workweek.
To calculate overtime pay, follow these steps:
- Determine the regular rate of pay
Divide the employee’s total weekly pay (including any bonuses or commissions) by the number of hours worked during the week. This will give you the employee’s regular rate of pay.
- Determine the overtime rate of pay
Multiply the employee’s regular rate of pay by 1.5 to determine the overtime rate of pay.
- Calculate the overtime pay
Multiply the number of overtime hours worked by the overtime rate of pay. For example, if an employee works 45 hours in a workweek with a regular rate of pay of $15 per hour, the overtime pay would be calculated as follows:
Regular pay: 40 hours x $15 per hour = $600
Overtime pay: 5 hours x $22.50 per hour (overtime rate of pay) = $112.50
Total pay: $600 + $112.50 = $712.50
Therefore, the total pay for the workweek would be $712.50, with $600 being regular pay and $112.50 being overtime pay. It’s important to note that state laws may have different requirements for overtime pay, so employers should always check their local regulations to ensure compliance.
Step 3: Calculate gross pay
Whether you’re calculating overtime or gross pay, accuracy is crucial when processing payroll. Gross pay is the total amount of wages or salary an employee earns before any deductions, such as taxes and benefits, are taken out. So, when you’re working out an employee’s gross pay, here are the steps you need to follow:
- Determine the employee’s hourly rate or salary
Depending on how the employee is paid, their hourly rate or salary will be used as the basis for calculating gross pay.
- Calculate regular hours worked
Multiply the employee’s hourly rate by the number of regular hours worked during the pay period. For example, if an employee works 40 hours in a week and is paid $20 per hour, their regular pay would be calculated as follows:
Regular pay: 40 hours x $20 per hour = $800
- Calculate any overtime pay
We’ve already taken a look at the steps for calculating overtime pay but it’s good to position overtime pay in the context of gross pay processing. Gross pay always has to be calculated before any overtime, so remember to factor in overtime after you’ve processed the employee’s regular working hours.
- Add any additional compensation
The same is true for calculating any additional compensation. If the employee received any bonuses, commissions, or other forms of compensation during the pay period, this is when you add those amounts to the regular pay and any overtime pay calculated.
- Calculate total gross pay
Add up the regular pay, overtime pay, and any additional compensation to determine the employee’s gross pay for the pay period. For example, if an employee worked 40 regular hours and 5 overtime hours in a week at $20 per hour, and received a $200 bonus, their gross pay would be calculated like this:
Regular pay: 40 hours x $20 per hour = $800
Overtime pay: 5 hours x $30 per hour (1.5 x $20 per hour) = $150
Gross pay: $800 + $150 + $200 = $1,150
Therefore, the employee’s gross pay for the week would be $1,150.
Step 4: Deduct taxes and other withholdings
Once you’ve calculated an employee’s gross pay, along with any applicable bonuses or overtime, there are several taxes and withholdings that may need to be deducted from an employee’s gross pay. The specific withholdings will depend on various factors, such as the employee’s tax filing status and any benefits or deductions that apply to them.
While the specifics may vary according to your state, industry, and specific requirements for each type of employee, a few steps of this process are universal. As a general rule, you’ll need to:
- Calculate federal income tax withholding
- Calculate Social Security and Medicare taxes
Calculate the Social Security tax at a rate of 6.2% of the employee’s gross pay, up to a certain annual limit. Calculate the Medicare tax at a rate of 1.45% of the employee’s gross pay, with no annual limit.
- Deduct state and local taxes
Check with the relevant state and local tax agencies to determine what taxes need to be withheld and at what rates. Some states do not have income tax, while others may have additional taxes that need to be withheld.
- Deduct employee benefits and other withholdings
Deduct any other benefits or deductions that the employee has elected, such as health insurance premiums, retirement plan contributions, or wage garnishments.
- Calculate net pay
Subtract all of the above deductions from the employee’s gross pay to arrive at their net pay.
- Record and report withholdings
Keep accurate records of all taxes and withholdings that have been deducted from each employee’s pay, and report them to the appropriate tax agencies as required.
Step 5: Issue payments
Actually paying your employees is one of the most important parts of payroll! So, whether you pay your employees via physical paychecks or direct deposits, don’t forget to issue payments on the schedule outlined in your company’s payroll policy.
Step 6: Record and report payroll taxes
Recording and reporting payroll taxes is a crucial part of the payroll process. Failure to comply with the regulations that govern payroll taxes can result in penalties, so it’s important to make sure that you’re on the right side of all payroll tax laws.
Although your business, industry, or state may be governed by a few additional regulations, there are a few general steps that every business is obligated to follow, including:
- Keep accurate records
Keep track of all payroll records, including employee information, hours worked, pay rates, and all taxes and withholdings that have been deducted.
- Determine tax liabilities
Calculate the amount of payroll taxes owed based on the employee’s wages and applicable tax rates, including federal income tax, Social Security tax, Medicare tax, state income tax, and any other applicable taxes.
- Submit tax payments
Submit tax payments to the appropriate tax agencies on time to avoid penalties and interest charges. Some taxes may be paid electronically, while others may require a paper check or money order.
- File tax forms
File all required tax forms on time, including Form 941 (Employer’s Quarterly Federal Tax Return), Form 940 (Employer’s Annual Federal Unemployment Tax Return), and any state or local tax forms. These forms provide details on the amount of taxes paid and withheld during the reporting period.
- Keep payroll records for the required period
Once you establish your payroll records, make sure you don’t throw them out! All payroll records are required to remain on file for a certain period of time, typically at least three years after the date of the last tax return, to ensure compliance with tax laws and regulations.
- Reconcile payroll taxes
Reconcile all payroll taxes and payments regularly to ensure that all taxes have been paid correctly and that there are no discrepancies.
Step 7: Maintain records for compliance
In the previous step, we took a look at the importance of holding onto payroll records for the required period of time. But in this step, we’re going to dig a little deeper and look closely at the type of records you need to maintain and the laws you need to comply with.
As you’ve already seen, payroll involves a wide range of highly detailed steps. But, unfortunately, it only gets more complicated when you consider the many federal, state, and local laws and regulations associated with payroll recordkeeping. So, let’s take a look at a few best practices for complying with payroll regulations.
- Recordkeeping requirements
Understand the recordkeeping requirements for your business under federal, state, and local laws. This may include keeping records of employee information, payroll taxes, and other payroll-related data.
- Keep employee files
Keep a separate file for each employee that contains their personal information, such as their name, address, Social Security number, and employment start date. Also, keep records of any changes to the employee’s information, such as a change of address or marital status.
Keep accurate records of the hours worked by each employee, including regular and overtime hours, and any paid time off taken.
- Keep pay stubs
Keep copies of all pay stubs issued to employees, which should include information on gross pay, taxes withheld, and any other deductions or benefits.
- Store records securely
Store payroll records in a secure location, whether in a physical filing cabinet or electronically on a password-protected server. Limit access to these records to authorized personnel only.
- Retention period
Understand the retention period for payroll records, which may vary depending on the type of record and the applicable law or regulation. Generally, payroll records should be retained for at least three years, but some records may need to be kept for up to seven years.
- Regular review
Regularly review payroll records for accuracy and completeness. This can help identify errors or discrepancies and ensure compliance with applicable laws and regulations.
Payroll Audit Checklist
In the previous section, we took a look at the importance of a payroll checklist, what it involves, and how it can help you with your payroll process. But because the payroll process is so intricate and multifaceted, it’s easy to get bogged down in all the details.
If you process payroll manually, there’s a lot of information to keep up with. And as you struggle through all the records, regulations, and data, you may find that you’re losing time and efficiency in other areas of your business. So, if you suspect that adhering to your manual payroll checklist is slowing you down and inhibiting your company’s growth, there are a few steps you can take.
A self-directed payroll audit is an awesome first step because it empowers you to assess the strengths and weaknesses of your payroll process and identify areas where you may need extra support. If you’ve never conducted your own payroll audit before, this checklist can help you understand and implement the steps.
But first, before we dive in, what exactly is a payroll audit? Put simply, a payroll audit is a thorough review of a company’s payroll system, processes, and records to ensure accuracy, compliance with laws and regulations, and identify any errors or discrepancies. Although audits are commonly conducted by outside investigators, it is absolutely possible to conduct one yourself.
Here are the general steps for conducting a payroll audit:
Step 1: Establish objectives
Start by identifying the specific objectives of the audit. What are your goals? What actionable information do you want to have when the audit is completed? For example, you may want to identify potential errors, improve compliance, or evaluate the overall effectiveness of your payroll process.
Step 2: Review payroll policies and procedures
An audit is the perfect time to take stock of your company’s payroll policies and procedures. Are they up to date and compliant with all applicable laws and regulations? Do you feel confident in your ability to implement these policies and procedures in the daily operations of your business?
Step 3: Gather data
Collect all relevant payroll data, including employee records, pay rates, hours worked, and all taxes and withholdings that have been deducted. How is this data being organized, stored, and accessed? Is it confusing?
Step 4: Analyze data
Analyze the payroll data to identify any errors, inconsistencies, or discrepancies. Compare the data to external sources, such as tax filings or bank statements, to ensure accuracy.
Step 5: Verify compliance
Are your payroll policies and procedures in compliance with all applicable laws and regulations? Are you equally familiar with federal and state tax laws? What about wage and hour laws and employee benefit regulations? How is your current payroll processing system complying with these regulations?
Step 6: Identify areas for improvement
As you’re going through your policies and procedures, this is a great time to identify the things that are working well for you and the aspects you find challenging. Are there any areas for improvement in the payroll system or processes? Would your daily operations be easier if payroll was automated?
Step 7: Develop a corrective action plan
Once you’ve identified some key areas for improvement, it’s time to develop a corrective action plan. What improvements do you want to see? How will you implement those changes? What will they look like in your daily operations?
For example, if you want to reduce the amount of time and energy you spend on admin, you may want to consider automating your payroll process. Automating payroll can also help with tracking employee time off and attendance, measuring employee productivity, and ensuring accuracy and compliance in payroll.
Payroll Implementation Checklist
So you’ve conducted a self-audit of your company’s payroll process and found some areas you’d like to improve. If you’re in this boat, you may want to consider implementing automated payroll processing software.
But if you’ve never automated your payroll process before, you probably have some questions about how that would work in practical application. So, let’s take a look at this payroll implementation checklist and the steps involved in automating your payroll.
It might sound a little complicated but implementing automated payroll is actually a super simple process. Although it does involve some initial research and data entry, this is just to help you choose the right platform and get set up. Once you’ve done that, you’re good to go; the software will do all the hard work for you! Here are the steps you’ll need to take:
Step 1: Identify your needs
There are lots of payroll processing platforms available but it’s important to choose the right one. To do that, think about the features that are most important to you. What features would make your daily operations easier? Where do you need the most support? What’s your budget for payroll software?
Step 2: Evaluate your options
All of these questions can help you evaluate the automated payroll platforms out there and find the best one for you. Some platforms — like Workyard — offer employee time tracking apps that are especially convenient for field workers. These time tracking apps can integrate seamlessly with your payroll software and make the entire payroll process easier.
However, some apps don’t have these features, so it’s important to consider those little extra details when making your selection. Once you’ve identified your business’ needs, you can narrow down the options of automated payroll platforms that will best support your company.
Step 3: Set up your payroll system
When you’ve found your ideal payroll platform, you’re ready to set it up. You’ll need to prep the platform with some initial employee data, payroll information, pay periods, and payroll schedules. To run smoothly, the app will also need information like the payroll taxes and deductions that must be withheld from each employee’s paycheck, such as federal and state income tax, Social Security tax, Medicare tax, and any employee benefits.
Step 4: Train employees
Once your system is live and ready to go, it’s time to introduce your employees to the new software. Take time to help them familiarize themselves with the software and get comfortable using it. Any good automated payroll platform should have user-friendly mobile self-service features. This will be a tremendous asset for your employees when they need to review pay stubs or log their hours, so make sure they feel confident with the software.
Step 5: Provide ongoing support
Initial training is awesome (and essential!) but don’t forget to provide your employees with ongoing support for the software. However, although you should do your best to offer support resources to your employees, you may occasionally encounter a payroll processing problem that you don’t know how to solve.
That’s where ongoing support for you and your entire team will be vital. The benefit of ongoing support is another thing to keep in mind when making your software selection. Platforms like Workyard have real (not robots!) customer service representatives on standby to help you with any support needs in case you or your employees run into a problem that needs a little extra help.
The Benefits of Implementing Payroll Software
Earlier, we took a look at the benefit of a payroll audit and how this evaluation may lead you to payroll software. But now that you know more about the function and implementation of automated payroll software, it’s time to talk about the benefits.
It’s easy to say that automating payroll can simplify the hassle of manual payroll processing, but are there other benefits? Automating payroll actually comes with a wide range of benefits that will streamline your business, reduce the time you spend on admin, and simplify daily operations. Let’s take a look at how that works.
- Increased accuracy
Payroll software reduces the likelihood of time tracking errors, such as incorrect calculations or data entry mistakes, by automating the process and performing calculations based on established formulas and rules.
Implementing automated payroll software shaves countless hours off your admin time by automating tasks that would otherwise be done manually, such as calculating taxes and deductions, generating pay stubs, and preparing tax forms.
Payroll software can be cost-effective, especially for small businesses, as it can reduce the need for dedicated payroll staff or outsourcing to a third-party payroll provider. It can also help you save money by saving time; if you’re running multiple aspects of your business on your own, you may be struggling to keep up.
And because time is money, it’s easy to lose money in some areas when all your time and effort is going to payroll and admin! But by automating payroll, you can redirect your time to other elements of your business, therefore saving both time and money.
Payroll software can be customized to meet the specific needs of the business, including the ability to add or remove features as needed.
- Better client relationships
When your payroll processing system is accurate, on time, and compliant with all laws and regulations, it can improve your client relationships. Clients will be happy because they know your billing and policies are accurate, timely, and detail-oriented. And they’ll also be happy that you have more time and energy to spend on customer service!
- Improved security
Payroll software can improve security by providing role-based access control, secure login procedures, and data encryption, which help to protect sensitive employee information.
- Compliance with regulations
Payroll software can help ensure compliance with regulations, such as tax laws and labor laws, by automating calculations and generating reports to help businesses comply with requirements.
Overall, using payroll software can help businesses streamline their payroll processes, save time and money, reduce errors, and improve compliance with laws and regulations.
How Workyard Can Help
Sometimes, old-school, paper-based things are awesome. But the joy of print is best left to hand-written cards or limited edition books — not your payroll process. Account books, ledgers, and dusty, complicated records are a thing of the past thanks to automated payroll technology, and our lives are so much easier for it.
Workyard knows that you deserve to spend your time growing and enjoying your business. That’s why the Workyard time-tracking app seamlessly integrates with your accounting and payroll software. Uniquely designed to support small businesses with field employees, Workyard is user-friendly, employs geofencing attendance data, and is equipped to sync with major payroll software platforms like QuickBooks and ADP.
So, when payroll processing software can streamline your daily operations and cut your admin time in half, manual payroll processing deserves to be a thing of the past! Let Workyard make your payroll checklist easier. Sign up for a free trial today!