How to Do Payroll: Everything Employers Should Know

Payroll is how employers provide monetary compensation to employees during a set period or specified date. It’s also one of the most essential functions a business needs to carry out to remain compliant. Local governments around the world set strict regulations that companies must adhere to, and they’re different in every country. If you don’t pay employees in compliance with local regulations, you could risk fines or legal action.

Payroll compliance is also important to keep employees engaged. According to a survey by The Workforce Institute at Kronos, around 49% of American workers will begin job hunting after experiencing only two errors on their paycheck. When a business fails to carry out one of the most essential tasks, employee engagement can decrease dramatically by breaking the implicit trust between employee and company.

To avoid such pitfalls, we'll go over how to do payroll properly, important things to know, and some frequently asked questions.

How to Do Payroll for Your Businesses

Doing payroll in-house is a common way to pay employees, but it tends to be more time-consuming and prone to errors than using an external provider. Nonetheless, it might be the best option if your business already has in-house local expertise.

Here's how it works:

1. Register as an Employer

First, you need to ensure your business is legally allowed to hire employees. Many countries require your business to have an established local entity in the country to set up payroll. If you don’t already have one, you might consider using an Employer of Record (EOR) like Omnipresent instead.

In the U.K., for example, you must register with HM Revenue and Customs. In the U.S., you'll have to apply for a Federal Employer I.D. Number. It's also best practice to open a local bank account solely for payroll expenses.

Additionally, some countries may require you to sign up for certain types of insurance. For example, in the U.S., most states require employers to have workers' comp insurance.

2. Establish a Payroll Process

Several factors go into determining a payroll process, including:

Schedule: A payroll schedule determines whether you pay employees weekly, biweekly, monthly, etc. Your schedule will depend on local laws, employee types, and cash flow.
Types of worker: Do you hire full-time, part-time, or contracted workers? Each type of worker will require different tax forms and have varying eligibility for benefits and overtime pay.
Benefits packages: What benefits are you providing to employees? Most countries require employers to provide certain benefits, so be sure to check local regulations. Additionally, offering more than the bare minimum can give you a competitive edge when recruiting and retaining talent, so striking a balance between attracting staff and maintaining your bottom line is key.
How employees are paid: Most employees prefer some form of direct deposit due to its simplicity and security, but there are other options (so long as they are compliant with the law), including cutting a check and paying in cash.

3. Collect Payroll Documents

Upon hiring, each employee must fill out crucial payroll documents based on what kind of employee they are as well as local regulations. In the U.S., employees must fill out a federal W-4 form, a state W-4 (or equivalent), and an I-9. In the UK, a new hire should supply their P45 if they have one and complete a New Start Declaration form.

4. Collect Timesheets, Calculate Pay, and Issue Checks

Generally, salaried employees will receive the same base wages each pay period, but if you have part-time or hourly employees, they need to track hours (either through software or manually).

Once all timesheets are turned in for each employee, you need to calculate the number of hours worked, the wages earned, and necessary deductions (e.g., benefits, taxes, etc.).

Payroll taxes are necessary expenses that come with employing staff, and it’s usually the employer's responsibility to withhold them. In the U.S., this includes Social Security and Medicare costs that each employee must pay by law. In the U.K., employees contribute to National Insurance, which helps to fund the National Health Service. Employers usually have to pay contributions too.

Keep in mind that each country has its own social programs and payroll taxes to which employees and employers contribute, so be sure to check the regulations in your jurisdiction.

Once you’ve validated and confirmed the output of your payroll, it's time to directly deposit all wages (minus deductions) into employees' accounts or cut them a check, depending on which payment method you've chosen.

5. Submit Payroll Taxes & Pay Third-Party Payments

Once all employees have been paid, employers must send the withheld payroll taxes to the appropriate government agency or third party (such as pension and benefits providers).

Depending on where your business operates, you may have to submit other payments, so find out what those may be from local tax authorities.

How to Process Payroll With a Payroll Service

As you may have guessed, processing payroll with a payroll service is much simpler than doing it manually in-house. Most payroll services will handle every aspect of payroll, such as determining the payroll taxes, deducting benefits, and issuing checks on your behalf. For the most part, you'll still have to ensure all employees fill out the necessary tax forms and track their timesheets, but the rest can be taken care of for you.

For instance, Omnipresent's global payroll solution handles payslips, social costs, employment taxes, invoicing, foreign currency exchanges, and more in over 160 countries and regions worldwide, making payroll easy for global teams.

Common Mistakes When Doing Payroll & How to Avoid Them

Payroll mistakes can upset the lives of employees that are counting on their wages and can even cause them to start job hunting. To uphold faith in your organization - and avoid legal repercussions - here are some common payroll mistakes and how to avoid them.

Wage Miscalculation

If a payment is missed, deductions aren't taken out, or if a paycheck is lower than it should be, employees will inevitably become frustrated or have trouble paying their bills. Considering it takes, on average, two to ten days to resolve these miscalculations, this frustration is understandable. Wage miscalculation also commonly occurs if an employee works overtime and doesn't receive extra compensation or if an employer forgets to record bonuses and other forms of taxable compensation.

It's best to rely on an automated system that can reliably repeat the same processes each pay cycle without error to avoid pay miscalculation. Additionally, ensure documents are organized so that all hourly employees receive the proper compensation for overtime work.

Missing Deadlines

Missing a payroll cycle or tax filing deadline creates headaches for both the employees and employer. A company may also be subject to late fees and other regulatory fines depending on the jurisdiction.

To avoid missing deadlines, it's important to stay organized and ensure you have either a dedicated staff to conduct payroll duties or outsource it to an organization that ensures you are paying compliantly.

Improperly Classifying Employees

Improperly classifying employees can lead to headaches and lowered employee retention as well as regulatory fines and other penalties, depending on the jurisdiction. For instance, in the U.S., each employee is classified as either exempt or non-exempt, meaning they may not or may qualify for overtime compensation, respectively. Misclassifying such employees can cause them to miss out on earned overtime pay or compensatory leave, opening the company up to legal liabilities.

To avoid misclassifying employees, be sure to have an established payroll process when registering as an employer. Alternatively, it can be helpful to get support from an expert partner or legal professional to ensure compliance with local laws.

Important Things to Know About Payroll Processing

Here are some of the most critical aspects of payroll processing regardless of country or company:

New hire documents: Smooth operations begin with ensuring new hires fill out the proper paperwork right from the get-go. Every country has different requirements, so make sure to check the relevant jurisdiction's laws.
Wages: Be sure to keep records of each employee's hourly wage or salary to avoid payroll errors. Keep in mind that in many countries, employees are entitled to extra pay for working overtime, on holidays, etc.
Deductions and taxes: Deductions and taxes are taken out of each employee's paycheck and could include health insurance plans, contributions to social programs, retirement plans, income taxes, union dues, etc. Be sure you understand local laws regarding how much each employee contributes and how to calculate those deductions.
Keep stringent and accurate records: Some places require payroll record-keeping by law. Regardless, keeping such records is crucial when tax season rolls around, in the event of a lawsuit, or even if a payroll error occurs. Some jurisdictions have laws surrounding which records must be kept and how long they must be kept, so be sure to check local laws.
Employee classification: Properly classifying employees is crucial in maintaining compliance with the law and ensuring each employee receives their earned wages. Each classification will affect whether an employee is eligible for benefits such as overtime pay, different types of leave, insurance (health, life, etc.), and more.

Other Payroll Processing FAQs

Here are some frequently asked questions regarding payroll processing:

How Do I Calculate Payroll?

1. Gross pay: First, calculate each employee's gross pay for the pay period (including overtime if applicable). For salaried employees that earn the same wages each pay cycle, calculating payroll manually is simpler because, in many cases, they are not entitled to overtime pay. Their gross pay is simply their annual salary divided by the number of pay cycles per year. Remember to factor in any bonuses.

For hourly workers, multiply their hourly wage by how many hours they've worked and be sure to factor in any overtime pay or other bonuses.

2. Net pay: Calculate pre-tax, tax, and post-tax deductions and subtract them from the gross pay. For the sake of transparency and record-keeping, show these itemized deductions on each pay slip. The remaining number is called "net pay" or, as it's colloquially known, "take-home pay." This number will be the final amount deposited into each employee's account. Be sure to tack on any employee reimbursements after all deductions are made.

How Long Does Payroll Processing Take?

The duration of the payroll process largely depends on whether you do it manually, pay period frequency, the tools involved, and more. Generally, businesses spend several hours each week processing payroll. In fact, a survey conducted by the National Small Business Association in the U.S. found that one-in-three small businesses spend over 40 hours per year on payroll.