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How to Process Payroll



The payroll process has changed much over the years, mainly in the manner in which it is processed. Most companies today prefer computer-based systems or outsourcing to process payroll. For a small company, manual processing may still be an option, although there are numerous cost effective ways to run it electronically. Use the following information to process payroll for your employees.
1. Gather employee wage information. Make sure it includes all wages, tips and compensation in the pay period.
  • If your system is computer-based, you will be able to run a report. If manual, collect all time sheets and other documentation.

2. Check to ensure that you have W-4 information for each employee to determine their marital status and with holdings. This will determine their tax liability for Federal Income Tax.

3. Calculate employee's gross pay from employment agreement or time sheet. Include tips, commission and overtime, if applicable.
  • Tax exempt deductions such as retirement or savings plans are deducted prior to calculating income tax, but other withholding taxes are according to gross.
  • If you are using a computer-based system, gross pay will be automatically calculated. If you are doing this manually, consider creating a payroll calculator spreadsheet that allows you to simply put in employee hours and it will calculate for you.

4. Determine withholding amount for Federal Income Tax. Go to the IRS Publication 15 (Circular E). Choose either the Percentage Method or the Wage Bracket Method and use the appropriate chart.

5. Calculate employee amounts for Social Security Taxes.
  • The Social Security tax rate is 6.2%. Once an employee has reached a gross cumulative pay of $106,800, no additional Social Security tax is withheld. Automated payroll systems will take no further tax automatically.

6. Calculate employee contributions for Medicare Tax.
  • This rate is currently 1.45%. All covered wages are subject to this tax. There is no salary limit at which employees become exempt from contributing.
7. Determine state and local tax liabilities based on your locality.

8. Deduct additional employee items such as retirement and savings plans, health insurance, charitable contributions or garnishments. Keep in mind that some deductions are before-tax, some after-tax.

9. Process payroll manually or through your selected system. Double-check amounts before dispersing. Print and disperse checks or stubs for direct deposit.

Comments

  1. Rahul Vikas20 July 2017 at 00:42

    Very informative Blog. Thank you for sharing this information.Payroll Outsourcing Services is a best choice for small business to reduce costs,avoid IRS penalties and mistakes.
    Payroll Outsourcing Company In India

    ReplyDelete

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