The payroll function is responsible for many aspects of the company's financial management, including filing, withholding, and handling of benefits and garnishments, among many others. Whether you own a small business or a large corporation, you can create a payroll system that meets your needs by reading this guide. We will explain what payroll is, why it's important, how to set up your own payroll system, and much more.

What is payroll?

In simple terms, payroll is the money that employers pay to their workers. Generally, the term is used when referring to the process that is used to calculate wages and taxes for employees.

An employer's payroll is the sum of all the wages and salaries it must pay to its employees in a given period of time. Payroll includes salaries, wages, deductions, bonuses, and net pay.

Did you know?

Due to the expense of paying each employee's salary or wages, payroll is typically the largest deductible for businesses.

How to Set Up Payroll

Obtain an Employee Identification Number (EIN)

You need an EIN to report taxes and other documents to the IRS. You must also provide the EIN to state agencies when reporting information about employees. Obtaining an EIN is easy either through the IRS website or by contacting them directly.

Take Care of Employee Paperwork

Form W-4, Federal Income Tax Withholding, is required for new employees. It is important to know the difference between an independent contractor and an employee. A legal distinction between the two can be ambiguous, and it impacts how your income taxes are withheld, what you pay for Social Security and Medicare, and what you pay for unemployment benefits.

Decide on a Pay Period

State laws may dictate payment periods, but most favor bi-monthly payments. In addition, even if your employee does not work the entire period, you must withhold income tax.

Document Employee Terms

Make sure your company clearly documents how paid time off will be handled, how employee hours will be tracked, and whether and how overtime will be paid. Other employer contributions, such as health plan premiums and retirement contributions, will also need to be withdrawn from employee paychecks and remitted to the appropriate organizations.

Keep Records

Employers are required by state law to keep certain records for a specific period of time. The W-4 forms, for example, must be kept for the duration of an employee's employment and three years after he or she was terminated. Furthermore, you should keep copies and dates of all deposits as well as W-2s and tax forms.

Choose a Payroll Service

Payroll management typically involves either in-house or outsourced services.  Details and accuracy are very important.

How to Do Payroll

Manual Method

Manual payroll systems require all payroll activities to be done manually. If you plan to do your own payroll, you can purchase standard timesheets for documentation and ask employees to complete them. After the time cards are completed, you can calculate the employee's wages and taxes, and then hand them their paychecks.

A manual payroll processing process involves a number of steps that may take more time than you think. Smaller and mid-sized businesses are especially susceptible to this. You will have a more challenging time manually processing payroll as you have more employees.

Payroll Software

Software for payroll brought new levels of competition to the world of business operations. Using these software programs, the correct compensation owed to each employee can be calculated. Automation allows payroll software programs to track, maintain, and deliver pay to employees with ease.

Despite the high cost of payroll software, it's also more reliable, secure, and accurate than manual payroll. Rather than rely on manual calculations or honor systems, your specialized software gets the job done right the first time, every time.

How to Convert Minutes for Payroll

Payroll conversion from minutes to decimals is easy. All you need to do is divide your minutes by 60. Suppose an employee worked 30 hours and 45 minutes in a week, simply divide your total minutes by 60 to get the decimal.

How to Calculate Payroll Taxes

Employers pay payroll taxes in two ways: one is out of their pockets, and one is collected from employee paychecks and remitted to the government.

Here are the payroll taxes that the employer is responsible for paying.


FICA tax covers social security and Medicare. Both employers and employees share the cost. Employer social security contributions are 6.2% and Medicare contributions are 1.45%. Workers will pay the same amounts.


FUTA tax covers unemployment insurance. Although the total is 6.0%, most states have a credit of 5.4%, meaning most employers pay only 0.6%.

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