About 40% of small businesses are hit with payroll penalties averaging $845. This year brings even more challenges and confusion around payroll and changing guidelines.

If you’ve never done payroll for your business before, you’re in for a lot of paperwork and guidelines. Don’t worry, though. We’ve got you covered in this article.

Read on to learn how to do payroll and make the entire process easy on yourself.

1. Classify Your Employees

Do you have employees or contractors? That distinction is an important one to make. If you have employees classified as contractors, you could get in major trouble with the IRS and your state labor board.

You want to make sure that your employees are classified as employees. If you’re not sure if a worker should be an employee or contractor, you should refer to these guidelines or check with your accountant.

2. Get Your Forms Together

You’re going to need a few documents, which you should have from when you hired your employee. All employees need to fill out a W-9 form and Form W-4. The W-4 is needed for tax withholding purposes.

You’ll also need the employee’s timesheet for the pay period, and their salary or hourly rate.

3. Calculate Earnings and Withholdings

The first step is to calculate the employee’s income. Salaried employees will have their annual salary divided by the number of pay periods. Hourly employees will have the number of hours worked multiplied by the hourly rate.

The withholdings are a little more complicated. You need to withhold federal income taxes, social security, Medicare, state taxes, and any additional contributions.

Start with federal income taxes. You’ll need to refer to the W-4 form and IRS withholding table to determine how much income taxes should be withheld.

Social Security and Medicare are flat taxes, which total 7.65% of the employee’s earnings. As the employer, you match these contributions as part of your payroll taxes.

If your state has an income tax, you’ll need to calculate those taxes, along with retirement and health plan contributions.

This is the most time-consuming part for employers that do payroll themselves. If you do employee payroll using Excel or handwrite your calculations, you’re increasing the possibility to make a mistake.

The easiest way around that is to use a program that has paycheck stub templates. You’ll just enter the basic information and let the templates calculate the withholdings for you.

4. Pay Employees

Your bank may allow you to set up direct deposit, which lets you transfer funds from your bank account to the employee’s account.

You may decide to cut a check and hand them a paystub which outlines their earnings and withholdings.

How to Do Payroll Painlessly

It’s no wonder that so many business owners find processing payroll to be confusing and time-consuming. You can make it seamless by setting up a regular payroll schedule and using templates to do the calculations for you.

Now that you learned how to do payroll, are you ready for more helpful business tips? Head over to the Business section of this site for more useful information.