The Complete Guide on How To Pay Employees
6 min. Read
Last Updated: 11/28/2023
Table of Contents
With more options for paying employees than ever before, including checks, payroll cards, and direct deposit, companies must implement flexible and adaptable payroll processes that still maintain a high degree of accuracy.
Timely and accurate payroll is an important part of employee management and can play a critical role in ongoing employee satisfaction. Today's employers have diversified payroll needs, from a desire to pay employees on different schedules to offering choices to employees on how they prefer to be paid. Outsourcing your payroll can help ensure that you have the resources and support needed to implement a cost-efficient system that helps you meet your employees' needs. Here's a closer look at some of the things business owners may need to consider when setting up reliable and compliant payroll processes.
How To Pay Employees
Gone are the days when an employer could just write paychecks and hand them to employees on Friday afternoons. To improve accuracy and help meet compliance standards, employers should understand how to pay employees correctly using established payroll processes. Documented procedures should cover the processes for adding new employees to payroll, making changes to pay rates, and ensuring all tax forms are submitted on time. Creating a payroll calendar can also help to set pay dates and determine the number of pay periods throughout the year.
Step 1: Define Payroll Methods and Processes
The goal of payroll is to calculate and distribute employee pay accurately and efficiently. Most companies need to review the Fair Labor Standards Act and applicable state or local laws and consider their requirements when determining how to pay an employee. As part of each payroll run, companies must also plan to withhold payroll taxes and other required amounts such as benefits payments from employees' gross pay. Once the payroll and withholding calculations are completed, employees' net pay will need to be distributed through paper checks, direct debits, paycards, or another method.
Step 2: Collect Necessary Employee Information
Employers need to collect information from employees to add them to a payroll system and properly calculate their pay. Paper forms can be used, or employees may be asked to upload or enter some of the information through an HR portal that links to the payroll processing system.
Some forms that are necessary for processing payroll include:
- An I-9 form for identify verification and to establish work eligibility.
- A W-4 Form containing the employee's withholding certificate to determine payroll tax withholding
- State and local tax forms
To calculate and distribute pay, employees also need to provide address information for paper checks or bank account information for direct deposit payments. Employee benefit selections and voluntary withholding amounts, such as retirement savings plan contributions, may also need to be accounted for when calculating net pay.
On an ongoing basis, non-exempt employees typically submit time cards or another record that reflects their work for the pay period. Time and attendance information from all workers can be used to record vacation time, overtime, sick leave, and other pertinent information that factors into pay.
Step 3: Calculate Employee Pay
While manual pay calculations are possible, they can be time-consuming and may lead to unintentional payroll errors. An automated system can be used to calculate a more complex payroll that goes beyond just base pay. Depending on an employee's classification, job duties, or compensation arrangement, additional amounts, such as overtime pay, a bonus, or commission might need to be added to the pay calculation.
Step 4: Calculate Employee Taxes and Other Withholdings
Once the employee's gross pay is calculated, you must figure in applicable federal, state, and local tax rates to determine the amount of payroll taxes that must be withheld. The employee's benefits payments should also be deducted from gross pay to arrive at the net pay amount for the payroll period.
Step 5: Distribute Employee Pay and Pay Stubs
Distribute payroll funds to employees according to their pre-selected method of receipt. Employers can typically offer several options, such as direct deposit, a paper check, or a paycard. Depending on their jurisdiction, employers may need to include specific information on the pay stubs typically provided to employees at the time wages are paid, either electronically or in paper form. Employees should review their pay stubs for accuracy and report any payroll mistakes.
Step 6: Submit Tax Withholdings and Forms
As an employer, you're responsible for calculating, withholding, and depositing all payroll taxes. Generally, tax reports are due each quarter and funds must be deposited according to a schedule determined by the taxing authority. Failure to properly withhold and report payroll taxes may result in fines and penalties for the employer.
Step 7: Fund Benefit Plans
Transfer the amounts withheld to fund benefits programs on behalf of your employees. Benefit plan payments deducted from payroll may include:
- 401(k) employee contributions
- Health, Dental, and Vision insurance premiums
- Voluntary employee contributions to FSAs or HSAs
Step 8: Update Payroll Records
Before the next time you run payroll, encourage employees to report any changes. Make the necessary corrections to the payroll records before the next pay date. Additionally, you'll want to add new employees to the payroll system, remove any departing employees, and update any changes in pay rates, withholding status, etc. for current employees.
Different Ways To Pay Employees
Employers may offer employees various methods to receive compensation to accommodate employees’ preferences and balance the efficiency and cost of the payroll process. Each of the types of payment methods for employees has its own set of pros and cons, as well as added costs. Decisions about offering paper checks versus direct deposit or paycards should take into account workforce demographics including the number of employees to be paid, the costs of setting up each method, and potential effects on employee satisfaction.
Offering direct deposit can help you pay an employee quickly while eliminating some of the administrative work involved in printing and mailing checks. Through direct deposit, employees provide a bank account where funds will be transferred to payday. Each employee will fill out a direct deposit form and ensure the banking information such as the routing and account numbers are correct. For each pay period, workers' funds are deposited directly into their account. With direct deposit employers can avoid the cost of issuing physical checks, simplify payroll accounting, and possibly eliminate the need to sign and distribute payroll documents.
Payroll cards, or paycards, are another option gaining traction with employers and employees. Payroll cards work well for employees who don't have a bank account or who don't want to share their banking information with employers. Employees can choose to have some or all of their pay deposited onto the paycard each pay period. The card can then be used like any debit or credit card, including features such as withdrawing cash through ATMs, paying bills online, or making purchases at retail locations. Prepaid paycards offer the advantages of affordable administration, eliminating banking fees for returned checks and other problems, and the ability to pay staff on time.
Many businesses continue to offer paper checks for a variety of reasons, from employee preference to compliance-related requirements. No matter the reason for offering this payroll method, employers can take advantage of payroll technology to avoid some of the hassles typically associated with issuing paper checks. To simplify the process when issuing a check payment from employer to employee, consider using a payroll processing service that can laser encode your signature and put the paycheck into an envelope, so they're ready to deliver to your team. This type of service can help ensure the professional presentation of payroll while minimizing the time your internal teams spend preparing the company's payroll.
Making a cash payment to employees can be acceptable in some instances, although this payroll method is generally associated with increased risk. Compared to other payroll options, the lack of safeguards surrounding cash payments may make employers more susceptible to theft or fraud. Also, if an employee disputes a cash payment, employers may not have the necessary payroll records on hand to offer as proof of payment. While you may be able to pay in cash and consider it to be an easy, straightforward way to pay, the benefits may not always outweigh the risks.
Mobile wallets are an increasingly popular way to send and receive payments. Although employees may prefer the accessibility and quick receipt of their pay through mobile wallet payments or payment apps, employers should carefully consider the pros and cons before adopting this payroll method. Originally designed to handle small person-to-person payments, mobile payment providers have made modifications to allow for business payments in recent years. Often, business-related payments through mobile payment providers incur additional processing charges. Also, distributing money through mobile apps may require the implementation and verification of new procedures in an established payroll process. The additional procedures may create new tasks for the payroll department to reconcile accounting and tax records to mobile payments. Before you distribute funds through a mobile wallet or app, you should also take the time to investigate the safeguards around the process.
What Is the Most Common Payment Method for Employees?
Direct deposit is the most common method of paying employees, allowing for efficient funds disbursement for even the smallest companies.
Why Businesses Should Focus on Paying Employees Accurately
Payroll mistakes generate additional burdens on your HR department in the form of research and corrections. Incorrect pay calculations can also lower an employee's confidence in their employer, potentially leading to job dissatisfaction and even increased turnover. Not to mention your business could face steep fines and penalties if you aren’t paying your employees correctly. To avoid unnecessary mistakes, services such as Paychex Pre-checkSM allow employees and payroll administrators to review and verify information before funds are distributed. In addition to Paychex Pre-checkSM, Paychex offers a range of user-friendly payroll solutions for small businesses as well as mid-sized and large companies that are customizable and flexible, allowing you to offer payroll options that meet your needs and remit payment to employees in a timely and accurate fashion.