What’s Included in This Payroll Checklist?

The payroll checklist below covers the preliminary requirements for setting up payroll in the United States, including:

• Federal tax ID number: the number the federal government uses to identify organizations for tax purposes
• Local tax ID numbers: the state and local numbers used for state and local taxation and record keeping
• State and local withholding accounts: bank accounts set up to keep deducted taxes until they can be paid on the correct day to their respective recipients
• Employee pay and tax information: the basic information and forms you need from employees in order to ensure they are employable and that you can pay them accurately

It goes on to outline the main steps in processing payroll, which are:

• Calculating time: from hourly timecards and timesheets
• Calculating gross pay: the amount of pay earned before taxes and deductions
• Determining withholdings: the amounts needed for federal and state taxes and benefits withholdings
• Calculating net pay: the final amount of pay issued to the employee
• Issuing pay: cutting checks and issuing direct deposit
• Distributing withholdings: sending taxes and other withholdings to the proper accounts and service providers

What’s Not Included in This Payroll Checklist?

If processing payroll has a rule that’s important above all others, it’s keeping accurate and complete records. This is important because, in the case of a discrepancy, either due to a current or former employee receiving incorrect pay or a state or federal agency receiving incorrect taxes, the burden of proof is on the employer to prove everything was accurate. This payroll checklist doesn’t include these elements, but it’s nevertheless critical for employers to remain in compliance by:

• Keeping detailed, complete, and organized records
• Paying state and federal taxes on time to avoid penalties
• Reporting hiring and workforce changes to the IRS

Should I Try to Process Payroll by Myself?

That’s a tough question. On the one hand, a payroll service does cost money, and any money saved is money that can be reinvested in your organization or used for other important initiatives. However, another way to look at it is to think of accurate, timely pay for what it really is: perhaps the most important benefit that you as an employer provide to your employees. In fact, most Americans live paycheck to paycheck, meaning that it wouldn’t take more than a single lost paycheck to mean missing a payment for something important like a mortgage or rent payment.

Paying for payroll software and payroll processing does cost money, but that cost is also a guarantee that you are providing that ultimate benefit to your people accurately and on time. It’s also a way to minimize your own risk, as the responsibilities for withholding and paying taxes, overtime, and benefits premiums are often handled by the payroll provider, who should be insured.

If you’ve never considered paying for payroll software or processing, take a look at handling all your payroll concerns at once by using HR software that includes integrated payroll as an affordable option. Need a hint? BambooHR has integrated payroll as an optional add-on. We’d love to take the stress of processing payroll off your mind so you can focus on taking care of your people.

Payroll Processing Checklist

Follow this step-by-step checklist to ensure you are processing payroll correctly.

BEFORE YOU START

***ALWAYS ensure you are keeping accurate records in case there is a discrepancy.***

Employers have the burden of proof if there is any dispute with employees or government agencies.

STEP 1. PRIOR TO PROCESSING

Prior to running payroll for the first time, you will need:

• An Employer Identification Number (EIN)
• State and local tax identification numbers
• Employee tax information
  • Form W-4 for full- and part-time employees
  • Form W-9 for contract and freelance employees
  • Form I-9 verifying eligibility for U.S. employment
• Employee wage or salary information
• Employee direct deposit information (if you pay via direct deposit)
• Federal and state withholding accounts
  • Electronic Federal Tax Payment System account (EFTPS)
  • State unemployment insurance account (SUTA), as detailed on your state’s Labor Office website 
  • State new hire reporting account
  • State worker’s compensation insurance account
• A payroll budget account
• A payroll schedule
• Direct deposit service and/or paper checks
• Your tax payment schedule

If you have completed these steps, you can skip to step 2.

STEP 2. REVIEW EMPLOYEE INFORMATION

Review your employee information prior to running payroll to ensure nothing new was forgotten and nothing has changed.

• New employee information
  • Full name and address
  • Whether they are an employee or independent contractor according to law
  • Social Security number or EIN from IRS Form W-4 for employees or Form W-9 for contractors
  • Employee tax withholding information from Form W-4 (withholding is not generally necessary for independent contractors)
  • Rate of pay and other earnings such as sales commissions or tips
  • Whether their earnings are subject to garnishment
  • Which employee benefits they have chosen that require withholding
  • Direct deposit bank account information (if that’s how you issue pay)
  • Form I-9, verifying eligibility for U.S. employment

• Current employees’ personal information
  • Address changes
  • Tax withholding changes
  • Benefits changes
  • Employment status changes
  • Job title changes
  • Wage/salary changes

STEP 3. CALCULATE GROSS PAY

Calculate the correct amount of money each employee will receive before withholdings.

• Hourly employees
  • Gather signed timecards or approved timesheets from managers
  • Review hours entered for each employee
  • Calculate overtime (varies by state)
  • Calculate any paid time off
  • Calculate any additional pay
    • Retroactive pay
    • Commissions
    • Bonuses

• Salaried employees
  • Calculate gross pay
  • Record any paid time off
  • Calculate any additional pay
    • Retroactive pay
    • Commissions
    • Bonuses

STEP 4. CALCULATE NET PAY

Calculate the amount of money you need to take out of each employee’s pay, ensuring pre-tax contributions are taken out before calculating taxes. Don’t forget to calculate any company-matched contributions to healthcare or retirement funds.

• Pre-tax or tax-exempt adjustments
  • Benefit premiums (pre-tax)
  • HSA contributions (pre-tax)
  • Retirement fund contributions (pre-tax for 401(k) and non-Roth IRA)
  • Reimbursements for expenses (not taxed)
• Taxes and withholdings
  • Federal income tax
  • Medicare tax
  • Social Security withholdings
  • State income tax
  • Local taxes
  • Wage garnishments
• Double check locations and amounts for accuracy

STEP 5. FINAL REVIEW

Before you cut paper checks or enter amounts for direct deposit, be sure to do a final pass to look for discrepancies and ensure that you are keeping your records updated.

STEP 6. PAYMENT

• Review pay instructions for each employee
  • Print and sign paper checks
  • Enter and approve direct deposit amounts

STEP 7. DISTRIBUTE WITHHOLDINGS

Money withheld from employees’ pay must be deposited to the proper accounts for eventual payment to state, local, and federal taxes, or directly to retirement funds and benefits providers. Any company-matched contributions should be included along with these distributions.