How to Pay Employees: So, you’ve hired your first few employees. They’ve done great, but it’s time for their monthly salary. What do you do now?
Many business owners find themselves stumped when it comes to paying the salaries of their employees. They often find themselves asking:
- How can I pay my employees?
- Which forms and information do I need to collect?
- Who’s going to manage the taxes?
- Which rules, legislation, and penalties do I need to be aware of?
All these concerns are valid, but they make it difficult for you to know where to start. However, to help you out, we’ve compiled a list of everything you need to know about when paying your first or fiftieth employee.
The War for Talent
Employee retention is notorious for being difficult, and according to Zenefits research, around 63.3% of 600 businesses with 50-500 employees find it harder to retain employees than hire them.
Why? Because of payment issues, benefits, and company values.
So, to retain your employees, you have to make sure your employees are paid well. And by that, I mean paid well — on time and on point.
Now that’s out of the way, let’s discuss how you can pay your employees.
How You Can Pay Your Employees
Paying your employees isn’t as easy as taking some cash and handing it to a cashier or swiping a credit card through an ATM, but it can be.
How? By ensuring your payroll structure is without any issues. Once that’s done, you can pay your employees whichever way you like.
Seems easy, right? It is — if you follow this advice.
Set Up a Payroll Process
Paying your employees is easy. But everything that comes before that payment is where the going gets challenging. So, to start, here’s what you need to decide on:
- Create a Payroll System – You can run the payroll manually, but purchasing payroll software or access to a paystub generator is always the best option.
- Set Up a Pay Schedule – You have to decide whether you’ll pay your employees monthly, bimonthly, biweekly, weekly, or daily.
- Decide on Pay Options – You have several payment options: direct deposit, check, cash, debit card, etc. Decide on one of them.
Once you decide on all of the above, you’ll also have to take care of the following:
- Withholding Taxes – These include federal, state, and local taxes, as well as Social Security and Medicare.
- Deductions – These include retirement, insurance, health benefits, etc.
- Tax Payments and Filings – These include specific forms (according to your state), filings, and payments.
After completing everything mentioned above, it’s time to run your payroll.
Run Your Payroll
Here’s how you can run your payroll:
- Calculate Your Employees’ Gross Pay
Your employees’ gross pay is the total amount they earn before taxes and deductions are taken from their wages.
It allows you to find out the amount of taxes being withheld from an employee’s pay and is calculated on how many hours an employee works or their full salary.
Determine the Withholding Tax and Deductions
You’ll need to calculate the following taxes for each employee:
- Income Taxes – These taxes include federal, state, and local taxes.
- FICA Taxes – These include Social Security (OASDI) and Medicare.
- Court–ordered Withholdings – These include child support, tax levies, spousal support, etc.
After you have determined all the above, deduct them from your employee’s gross pay to find their net pay.
Deliver the Net Pay to Your Employees
The net pay must be delivered to your employees monthly or on each payday. How you do that depends on your selected payment options and your employee’s preference.
Most employers typically use the following options:
- Direct deposit
- Debit card
However, according to the American Payroll Association, most people receive their paycheck through direct deposit.
File Your Taxes and Benefits Payments
You are responsible for forwarding the taxes withheld from your employees’ paychecks to the IRS. Plus, you also have to pay an equal amount of employer contributions for Social Security and Medicare as paid by your employee.
Moreover, you also need to send the deductions made for insurance and retirement plans to the appropriate carrier. Once that’s done, just remember to keep the following in mind:
- Keep Payroll Records – Payroll records are documents associated with the payroll process, such as W-4 and W-2 forms, timecards, direct deposit authorizations, pay stubs, employee benefit forms, commission plans, etc. Also, according to the Fair Labor Standards Act, you have to keep payroll records for a minimum of three years.
- Maintain Tax Records – You also have to keep tax records for at least four years, according to the Internal Revenue Service (IRS).
Methods of Paying Your Employees
There are three methods you could use to pay your employees. They include:
Salaries are the primary method for paying higher-level employees like managers and those in the C-suite.
However, people with high income skills don’t get their salaries at once. Their wages are divided into equal payments depending on the employer’s payment schedule.
So, if you have to pay your upper management, you should consider paying them a salary.
Pay by the Hour
Hourly payments for every hour worked by an employee. They are determined by federal and state laws.
Moreover, you also have to pay overtime according to state and federal laws. For example, the Contract Work Hours and Safety Standards Act applies to federal workers and contractors. It says hourly employees who work overtime must get 1.5 times their base pay.
Commissions are payments given upon the completion of a goal or sale. They’re usually fixed percentages of the total cost of goods or services sold. Commissions must be paid with or in place of a salary.
The Bottom Line
Paying your employees may seem like the most challenging thing, but it’s not — if you do it the right way.
Remember to meet every law of the Fair Labor Standards Act (FLSA) covered. Also, ensure you keep payroll records for at least three years. They’ll help you get out of difficult situations many times.