Want to eliminate the pain of processing payroll? Customizable payroll software, such as Vagaro Payroll, ensures all employees are paid accurately and on time—minus the headache! As your business grows and your workforce expands, payroll can become a challenge. Automated & affordable payroll software is vital for any business, especially as they grow and payroll management becomes a more time-consuming, costly and error-prone process. Below is a step-by-step guide for setting up and processing payroll, and how a feature-rich option like Vagaro Payroll automates and streamlines the process, leaving you with more time to reinvest in your business.
What is Payroll Software & Why Do You Need It?
Payroll software integrates with your other business systems to manage, maintain and automate employee pay. For example, Vagaro Payroll is built directly into the software for seamless use on the Vagaro platform. Cloud-based software is best for small businesses because it’s cost-effective, can be accessed anywhere with an internet connection, and updates automatically.
Your payroll software ensures that all your employees are compensated in the right amounts and at the proper times via a mutually agreed-upon payment method. Oh, and it saves you a LOT of time, as payroll and taxes—which are eternally connected—are consistently named among the most time-consuming aspects of business ownership1 (just ahead of schedule management).
That’s not all, though. Vagaro users can additionally count on their customizable payroll software to:
- Support direct deposit
- Maintain detailed payroll histories & tax records
- Ensure compliance with local, state & federal tax laws
- Manage employee tax deductions & other withholdings
- Easily onboard new employees
- Customize & manage PTO (Paid Time Off) schedules
- Store sensitive financial information securely
You probably realize that the above is essential to your business’s security, strategy, revenue and legal compliance. Remember that doing payroll manually, or by using several different programs instead of one integrated payroll software, can undermine all of these. Nevertheless, these are the steps to follow to do payroll accurately.
Payroll First Steps
No better place to start than the beginning, right? This may be a review for some business owners and if you’re one of them, feel free to jump ahead. However, if you’re just starting out, or recently took on one or more employees, you must complete the following:
Get an EIN (Federal Employer Identification Number)
A federal employer identification number (EIN) is a number the IRS uses to identify and track your business’s payroll tax payments and forms. Since an EIN is legally required to run a payroll, getting one is straightforward, free and can be done on the IRS website.2
Speaking of the IRS...
Register with the Electronic Federal Tax Payment System (EFTPS)
The EFTPS is a free online payment system designed by the IRS that allows you to pay your federal payroll taxes and federal unemployment taxes right from your computer. This is technically optional if you are using a payroll service, which will send in your tax payments for you.
Register As an Employer
To run payroll, you must register as an employer within your specific state. This process is slightly different for each state and comes with different requirements. Don’t worry—you can easily find your state’s small business registration requirements online.
At this point, you'll also want to investigate all relevant pay and labor laws before you run your payroll. A huge benefit of using a cloud-based, automated payroll service like Vagaro Payroll is that it already comes equipped with features that help you stay compliant with local tax regulations and labor laws. And, as you can probably guess, tax-compliant payroll software saves you a lot of time & headache.
Tax & labor laws may relate to such things as:
- Payroll frequency
- Employee paystub information
- Minimum wage
- Local income tax
- Paid or unpaid breaks
- How an employee receives their final paycheck
- Onboard Your Employee
Welcome aboard! During the onboarding process, you’ll collect essential employee information, such as full name, address, Social Security number, tax withholding forms (W-4; 1099), and bank account details for direct deposit.
Payroll software, like Vagaro Payroll, will streamline how you capture all this information and store it for future needs. Vagaro Payroll additionally gives your employees the choice to self-onboard, saving time and ensuring that routing numbers and other important payment information, as well as personal contact information, is accurate.
Determine Employee Types
You will likely employ a mix of different employees. Whether they are full-time or part-time; salaried or hourly; exempt or non-exempt, you must include these employees on your payroll and withhold all relevant local, state, and federal income & payroll taxes from their paychecks.
The rules change when an employee has “vendor” or “contractor” status. Independent contractors handle their own taxes, meaning you aren’t required to run payroll or withhold anything from their checks. You simply issue them a check for their full rate and, from there, they calculate how much tax they owe and pay those taxes.
Vagaro users can easily assign employee types accordingly, a key feature since misclassifying employees can lead to (potentially costly) problems with the IRS.
Added Payroll Flexibility for Contractors
To accommodate our many users in the salon, beauty, barbering and other industries who employ—or work as—contractors, the software further simplifies how 1099 workers get paid by:
*Enabling chair/booth renters and others to pay themselves as employees through Vagaro. *Giving the option of paying independent contractors through regular payroll, ensuring they receive timely & accurate compensation.
This flexibility streamlines your financial processes and makes tax documentation & compliance (two potential headaches) a breeze.
Set Up Your Payroll Schedule
Decide on a payroll schedule (Vagaro Payroll, for example, offers weekly, bi-weekly, monthly, and twice-per-month pay frequencies) and communicate it to your employees. Remember that consistency is crucial for smooth payroll processing, establishes trust and ensures accuracy for when tax season arrives.
A good payroll app should also enable you to customize and automate your pay schedules for each employee type (e.g., regular full-time employees paid weekly; part-time employees paid bi-weekly, etc.). However you want to set it up for your business, there should be an option for that. Enabling direct deposit is one of the best ways to ensure that all employees always get paid on schedule.
Off-Cycle Payroll
Yes, it's true that, sometimes, payments fall outside of the usual schedule. Whatver the reason for it may be, these are commonly called off-cycle payments, and can be difficult, or just an annoyance, to accommodate. Vagaro's off-cycle payroll capability alleviates this potential annoyance.
Whether it's bonuses, corrections, or unexpected payments, this feature ensure your employees receive their payment promptly and accurately, maintaining satisfaction and efficiency throughout your payroll system.
Calculate Gross Wages
To calculate each employee's gross pay, you’ll need any combination of the following:
Regular Hours: Regular hours worked by your employee during the pay period could be based on a standard 40-hour workweek or specific work hours established for your business.
Overtime: Any hours worked beyond the regular workweek that qualify as overtime. Overtime pay is often calculated at a rate of 1.5 times the regular hourly wage.
Shift Differentials: This involves different compensation amounts for varying shifts, like a premium put on night shifts, for example.
Bonuses or Commissions: Make sure you have a consistent method for calculating bonuses, commissions, incentives, and other additional compensation.
PTO, Vacation & Sick Time: You may choose to treat vacation, sick days, and personal time separately, or bucket them all together in a PTO policy, letting employees use the time any way they want.
That's a lot to keep track of, and Vagaro members have all the above calculated for them in just a few short clicks. They can get even more granular by assigning multiple pay rates per employee and customizing commissions for services & products. Vagaro businesses can additionally create their custom PTO policies, enabling employees to manage their own time off—and you to approve it—without ever leaving their Vagaro Pro account.
Calculate Pre-Tax Deductions
Pre-tax deductions are voluntarily withheld by employees from their paychecks.
They include things like health benefits and retirement contributions (401K, 403B, IRAs, etc.) and are deducted before payroll taxes.
Speaking of which...
Deduct State & Federal Taxes
Now, we must deal with one of life’s certainties: taxes. You’ll need to deduct the following:
Federal Income Tax
One element of an employee’s federal tax withholdings. This is determined based on the information provided by your employees on their W-4 form, which includes details such as filing status and allowances. There are a few methods for determining federal income tax, and the IRS explains them in detail.3
FICA Payroll Tax
This is the second part of your employee’s federal tax withholdings and includes Social Security and Medicare. Your employees handle paying half this tax; you pay the other half. Remember, you still must subtract their share from their gross income.
State Income Tax
If your state has income tax, withhold the appropriate state income tax based on your employee's W-4 and state tax regulations.
Local Income Tax
Some districts or localities may have additional income tax requirements. If applicable, withhold the necessary local income tax.
Remember that errors in tax calculations or reporting can lead to penalties, audits and other disruptions that cost businesses money every year4. As with gross wages, tax-compliant payroll software like Vagaro Payroll automatically deducts taxes from paychecks for you, saving time and potentially costly errors.
Include Mandatory Deductions
“Mandatory deductions” usually refer to wage garnishments due to some form of delinquent debt (credit card, student loans, medical bills, etc.), unpaid taxes or alimony. You may never have to deal with wage garnishments, though if you do, you’ll be notified of how much to deduct and where to send it by the government.
You must subtract this amount from your employee’s “disposable earnings,” which are their earnings after necessary payroll deductions but before their voluntary deductions, like retirement contributions and health insurance.
Pay Your Employee
To determine your employees’ net pay, subtract all the above deductions from the gross pay. You would then transfer the net pay directly into employees' bank accounts, which is easy when you use a payroll system that supports direct deposit, like Vagaro Payroll. If it doesn’t, you’ll have to print and distribute paychecks.
Most states require employers to include a pay stub with their employee’s paycheck, so don’t forget this step. Different states have different requirements for what should be included on the pay stub, so make sure you know what the rules are in yours.
Keep Clear Records
Keeping detailed records helps in daily operations and serves as a valuable resource during tax season or in case of audits or legal inquiries. Regularly review records to identify and rectify any errors or discrepancies promptly.
Make sure you have the following records stored safely and ready to reference at any time:
Employee Payroll Records
Employee information such as payment dates, hours worked, gross pay, voluntary deductions, wage garnishments, all taxes & net pay.
Copies of pay stubs, which you will provide to employees as documentation of their earnings and deductions.
Tax-Related & Year-End Records
These records include:
- Copies of tax forms, including W-4s for each employee and any other relevant tax documents.
- Records of payroll tax filings at the federal and state levels. This includes quarterly & annual reports, such as 941 forms for federal taxes.
- W-2 forms for employees & 1099 forms for contractors.
Well, that’s a lot of record keeping, isn’t it? Remember that digital records are much easier to organize, search, and retrieve, making it more efficient to manage and keep accurate payroll records. Digital payroll solutions like Vagaro Payroll store all these records and generate 1099K forms for contract workers. It also enables employees to view their pay stubs and pull W-2 forms and other document types straight from Vagaro.
Make Sure Your Payroll is Secure
This ultimate step could, hypothetically, be the first. Your payroll system stores a wealth of confidential information, including bank account details and salary information—all attractive targets for cyber thieves and malicious intent.
As mentioned above, Vagaro Payroll is a cloud-based payroll system equipped with robust security features. Whatever your payroll solution is, you must ensure that this information is always protected against data breaches.
Payroll may be one of the least favored aspects of running a growing business, but it must be done—with accuracy, organization and security in mind. Running payroll doesn’t have to be difficult. Investing in modern, feature-rich payroll management software, like Vagaro Payroll, makes this process a breeze. Businesses using Vagaro have the added benefit of an intuitive payroll management system integrated into the same software they use to manage every other aspect of their business. Spare yourself—and your employees—the pain of payroll by relying on Vagaro. Of course, integrated payroll and HR is only one tool at your disposal. Start your 30-day FREE trial now and experience an easier way of doing business with the app that simplifies things for you at every step!
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