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The Ultimate Guide to Running Payroll


One of the essential parts when running any company, no matter the size or type of industry, is learning how to run payroll and how to run it correctly. Last year, business owners paid a combined $4.5 billion to the Internal Revenue Service (IRS) in payroll tax penalties.

The following is an overview of how to run payroll, starting with how to calculate wages and avoid hefty fines if taxes aren't filed correctly. We’ll then dive deeper into different options business owners have when paying their employees or having others do it for them.

Calculating Wages

When it comes to calculating wages, the employer must identify if the person they're hiring is considered an employee or an independent contractor because each kind fall under different rules. If identified incorrectly, the employer could have to pay back employment taxes.

Employers must then calculate the correct taxes on compensation, which can include everything from regular pay, overtime, vacation and sick pay to commissions, bonuses, and benefits, as well as worker's compensation.

Paying Payroll Taxes

Every employer must pay payroll taxes to the federal government for each employee it pays. Knowing the rules, due dates, and requirements of each tax is a task that can sometimes cause confusion if not properly understood. Here is a brief explanation of a few payroll taxes which are mandatory for most employers:

  • Federal Income Tax – a payroll tax employers withhold from an employee's wages or salary, which is reported to the Federal government and applied to the employee’s calculated tax liability at the end of the year.
  • Social Security and Medicare Taxes – a tax generally paid equally by the employer and employee in order to fund these entitlement programs.
  • Federal employment Tax – an employer tax paid to the federal government to provide funds for paying unemployment compensation to workers who lost their jobs.

Paying Employees

The two most common ways companies pay its workers are by check and direct deposit. Direct deposit, the most popular way employees are paid in the United States (more than 60 percent of employees), offers many benefits to employers and employees, including cost savings and convenience.

The physical acts of writing, folding, and delivering checks are eliminated with direct deposit, which saves time that can be spent on other tasks. Paper costs are reduced for employers as well, helping a company save anywhere from $2.87 to $3.15 per check and become more environmentally friendly.

For employees, an electronic transaction means there's no longer a need to wait in line at the bank to deposit a check. Employees don't even have to be in the office to get paid. They can be on vacation or have a sick day and not have to worry about getting paid.

One method of payment that is often overlooked, though, is through a paycard. Most paycard programs don't require any maintenance fees or additional charges for employers. Just like direct deposit, paycards cut down on paper costs and can save money when it comes to producing and delivering checks.

Outsourcing Payroll

If an employer doesn't want to take the time and/or energy to learn all the nuances of running a payroll, there's always the option to hire an accountant or outsource to a payroll company.

Handing over payroll duties to an accountant who is trained in the matter can take a load off a business owner's shoulders. They're specifically trained to handle the task, so hiring one frees up the employer to concentrate on more important aspects of the company.

Some of the top reasons to outsource payroll outside of potentially saving time and money include greater security, monitoring changing in government regulations, and having the expertise of payroll professionals.

For beginners looking to gain more of an understanding on how to run payroll, Payroll 101 white paper is a great place to start. It's a guide for employers that tackles basic information every business owner should know.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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