Payroll management in 2024: Tips and best practices

Why is payroll management important?

Payroll management is the process by which an employer renders payment for services performed by their employees. But, it has more components. You must also deduct pre- and post-tax withholdings, garnishments and insurance premiums and ensure those bills are paid on time and accurately. 

“Employee compensation is invariably a company’s largest cost, and errors might lead to significant financial losses,” says Michelle Delker, the founder and CEO of The William Stanley CFO Group. “Whether it’s calculating taxes or individual salaries, these transactions can also lead into significant financial regulatory reporting, so inaccuracies may influence your company’s overall image.”

Not being able to track your payroll accurately could end up costing you in the form of penalties, higher employee turnover and even legal action against your company. Since each state has their own wage and tax filing regulations, Delker emphasizes that sound payroll management ensures your business stays on the right side of the law by meeting all regulatory obligations.

Featured payroll software offers

OnPay

Learn More

Via OnPay’s website

Monthly fee

$40 per month plus $6 per employee

Direct deposit

Yes

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

Yes

Rippling

Learn More

Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

The 11-step payroll management process

1. Designate who is responsible for payroll

Whether it’s yourself, a bookkeeper or someone in your finance department, someone needs to be responsible for administering payroll for your workers. Whoever this person is, they need to be organized, detail-oriented, know their way around any payroll software your business uses and know state, local and federal employment tax laws. 

2. Create a payroll policy

Establishing guidelines or policies is a great way to ensure that everyone understands what the payroll management process looks like and can ensure that tasks are performed within required regulations. Here is what you might include in your policy guide: 

• Clear and defined work weeks to comply with regulations such as overtime rules. 
• How workers can log their hours, whether it’s using a paper timesheet or by the clock.
• Rules around lunch breaks or rest periods as required by law.
• If and how overtime is allocated and paid at your company. 
• The pay schedule for employees.
• Any mandatory or voluntary payroll deductions. 
• Wage or salary structures.
• How employees are paid (direct deposit or check, for example).

3. Classify workers

To comply with payroll tax laws and ensure you’re giving your workers the right forms, it’s essential you classify them correctly. You or your payroll department need to determine whether workers are employees or independent contractors. This determination will affect how you track and manage taxes and deductions. You must also ensure you classify them as either exempt or non-exempt employees to accurately account for overtime pay. 

To learn whether you should classify a worker as a contractor or employer, read our W2 vs 1099 guide. In addition, read our exempt vs. non-exempt guide to learn which employees are entitled to overtime pay and which are not. 

4. Gather relevant documents from workers

Once you’ve classified your workers, you can ask them to fill out and submit the correct documents. Aside from your onboarding paperwork — which can include your payroll policy and other job responsibilities — ask employees to fill out form I-9 and form W4 to gather identifying information and to determine how much taxes youl need to withhold from their paychecks. Ask contractors to fill out form W9 to gather information needed for reporting their income. 

In addition, if your state requires individuals to pay state taxes, ask your employees to fill out any relevant state tax withholding forms. For example, a New York employee may have to fill out form IT-2104, employee’s withholding allowance certificate to indicate state withholding amounts. 

5. Track worker pay 

You or your payroll administrator will need to decide how to track worker attendance and time in order to pay them accordingly. While manual tactics can be fine, many businesses prefer automated methods to reduce human error and make it easier on the payroll administrator. 

It is important to also pay close attention to whether your employee is exempt or non-exempt from receiving overtime pay (see step three). For non-exempt employees, payroll administrators must also ensure they are separating regular work hours from overtime hours. 

6. Calculate gross pay

With the worker’s pay and hourly or salaried amount in hand, it’s time to calculate the worker’s pre-deduction and pre-tax pay, called the gross pay. To do so, multiply the hours worked (by hourly workers) by their hourly pay rate. In addition, follow state and federal laws regarding overtime pay and calculate hours in excess of full time by the overtime pay rate. Add them together.

For exempt employees who are salaried, begin with their yearly salary and divide it by the number of pay periods in the year to find their gross pay per pay period. 

7. Deduct pre-tax contributions

Depending on the employee, you may also have to deduct contributions to pre-tax retirement plans and other pre-tax benefit programs. For example, a pre-tax 401(k) plan contribution may be deducted at this point. In this case, taxes are paid on the contribution upon withdrawal. In addition, in some states, wage garnishments are deducted from employees’ gross pay. Refer to plan details and court orders to determine what deductions apply at this point. 

8. Apply relevant tax withholding and deductions

As an employer, you are responsible for withholding any applicable money for taxes from employees’ paychecks. These amounts are based on the W4 forms your employees submit; current federal, state and local income tax rates; the required Medicare and Social Security withholding rates and state unemployment insurance rates. 

To learn more about what payroll taxes you must withhold, read our payroll tax rates guide. 

9. Withhold post-tax deductions

Now you must account for post-tax deductions, including garnishments and benefits contributions. For example, some retirement plans are deducted after taxes are paid. In this case, when the beneficiary withdraws the money, they will not have to pay income taxes on the funds because they’ve already been paid. In some states, court-ordered garnishments, such as child support garnishments are also post-tax deductions.

To learn more about pre-tax and post-tax retirement accounts, read our Roth IRA vs. traditional IRA guide.

10. Issue paychecks

Depending on what arrangements you’ve agreed to and your workers’ preferences, you either need to schedule direct deposit payments or print physical checks to distribute to employees. Depending on any legal requirements, you may also need to print or send pay statements electronically. 

11. Pay government agencies and insurance carriers

Once you’ve withheld payments to cover employees’ taxes, unemployment insurance, health insurance and other benefits programs, you must remit those payments to the appropriate agencies. 

You must also pay your agreed-upon contributions to these programs. For example, if you’ve agreed to match contributions to a post-tax retirement plan, you must do so at this point. 

In addition to paying employees’ contributions to these agencies, you must also pay your portion of payroll taxes, namely 6.2% of the employee’s wage amount for Social Security tax and 1.45% of the employee’s wage amount for Medicare taxes on the employees’ behalf. 

Can payroll management software help?

Yes, using payroll management software can help to streamline your operations. A payroll software can help you automate the entire process, from issuing W4 forms and calculating time worked, to calculating gross pay, managing deductions and their payments to appropriate agencies and issuing paychecks. The benefits of using a payroll software include a reduced risk of human error by decreasing required manual tasks. 

“By automating payroll tasks, businesses can save a substantial amount of time and effort, which can be redirected towards strategic initiatives,” says Delker. “Payroll software also facilitates reporting and ensures the necessary documentation is available for audit and compliance purposes.”

Whether you’re a very small business or one with 50 or more employees, there are payroll software solutions for all types of budgets. To kickstart your research, check out our list of the best payroll software services. And, if you’re a startup or on a tight budget, read our best free payroll software services list. 

Featured payroll software offers

OnPay

Learn More

Via OnPay’s website

Monthly fee

$40 per month plus $6 per employee

Direct deposit

Yes

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

Yes

Rippling

Learn More

Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

Frequently asked questions (FAQs)