Paying your employees is one of your business’s most important responsibilities. After all, earning a paycheck is one of the main incentives for getting a job. But the process of paying employees is often more complex than many business owners realize, especially as they expand globally. As a result, you’ll need to carefully decide how to do payroll at your business to make the process as easy as possible for you and your employees while staying compliant with the law.
In this guide, we’ll walk you through everything you need to know about paying employees, including choosing the best payroll process for your business, different ways to pay employees, common mistakes to avoid, and much more. Let’s get started.
How to Pay Your Employees
How you pay employees will mainly depend on the payroll process you use. There are many steps to this process, so let’s go through each step one by one.
1. Decide Your Payroll Method
Before you can start paying your employees, you need to decide on a payroll process that fits your needs. Which method is best for you will depend on several factors, primarily how many employees you have and how much you can afford to invest in a payroll system.
The four most common payroll operations methods are in-house manual payroll, outsourced payroll, bookkeeper-managed payroll, and automated payroll systems. Each of these systems has pros and cons to consider. For example, in-house payroll can be a cost-effective option for small businesses with few employees; however, it becomes less favorable as your business grows and adds more employees, particularly as you expand internationally.
Businesses with many employees are likely to benefit from using an outsourced payroll service. This is particularly true if your company has workers worldwide and needs global payroll solutions. This allows you to focus on running your business without managing the complexities of international payroll.
2. Determine the Type of Compensation You Offer Employees
There are three main types of compensation to consider:
- Hourly wages are paid by the hour at a rate set by the employer (though they must meet the local minimum wage). Hourly wages are ideal for small businesses with part-time positions and employees who don't work consistent schedules.
- Annual salaries are yearly earnings paid at a fixed amount each pay period. The amount earned per paycheck is determined by dividing the employee’s annual salary by the number of pay periods in the year. Salaries are best for full-time employees who have predictable schedules.
- Commissions are earnings paid when an employee achieves some form of sale. For example, if an employee receives a 10% commission for selling a $1,000 television, they earn $100 for that sale. Some jobs are paid entirely on commission, but many employers opt to include commissions on top of hourly or salaried pay. Commission pay is most often found in sales roles.
Each of these compensation types is best suited for different job roles, so you may well offer all three types of compensation at your business for various positions.
3. Work out How Much to Pay Employees
You might be wondering: “How much should I pay my employees?”. Well, aside from meeting minimum wage requirements, how much you pay employees is mainly up to your discretion. Offering competitive wages is a wise tactic, as it will go a long way in helping with both employee recruitment and retention.
Research what your competitors are paying workers and aim to at least match what they’re offering whenever possible. Also, consider the type of work and where your employees are located. For example, certain jobs are in greater demand in different regions worldwide, so your wages should reflect that. If your pay is lower than average for similar work in the area, you’ll likely find it difficult to attract new employees.
If you’d like more information about salary benchmarking for global teams, check out our resource here.
4. Choose Your Payroll Schedule
Your country or region may have laws that determine how often employees need to be paid. You can opt to pay employees more frequently than the law requires, but not less. Most employers pay their employees weekly, biweekly, semimonthly, or monthly. It’s best to use a payroll schedule that is compliant with local laws and balances the needs and expectations of you and your employees.
It’s worth noting that in some countries on-demand payroll is becoming more popular, wherein employees can get paid on the day work is performed instead of waiting for a regular payday. However, this is still a fairly new concept and may not be permitted in certain jurisdictions. It can also be complex and costly to implement.
5. Fill in the Necessary Paperwork
Once you’ve officially hired a new employee, they’ll need to complete various paperwork to be registered with a payroll number in your system and start receiving their paychecks. These forms are necessary so employers can withhold the required amount of tax from each paycheck.
The paperwork needed varies by the employee’s country and region, so make sure to research what forms are required in their location so you are paying remote employees compliantly. For example, in the United States, employees need to fill out a federal W4 tax form, state tax forms, and an I-9 form to verify work eligibility.
Remember, if you hire talent in more than one country, you’ll likely need multiple payroll accounts, as each country has different requirements and systems.
6. Calculate Employee Pay & Taxes
The first step in calculating an employee’s pay is determining their gross pay for the pay period. This will depend on the type of compensation they receive and the payroll schedule you use.
For hourly employees, multiply their hourly wage by the total number of hours worked in the pay period. For salaried employees, divide their annual salary by the number of pay periods in the year. For employees earning commissions, determine their total commission earnings in addition to any hourly or salaried pay.
After determining what will make up gross pay in the pay period, work out how much payroll tax and income tax must be withheld. This will depend on the employee’s location.
Finally, look for any additional contributions and deductions the employee pays into, such as any insurance policies or retirement plans. Then, subtract all taxes and deductions from their gross pay to calculate their final net payment.
Before moving on you should always validate the output of your payroll. Where in-house payroll is used, the person who validates it might be a member of the senior management team, finance, or HR/people team, where outsourced, the partner should provide a Pay Register to check against. Once satisfied, you're good to go.
7. Distribute Employee Pay
After completing the previous steps, you can finally distribute pay to your employees. Most businesses pay their employees with checks or direct deposit, but other payment methods might be relevant to your business. We’ll cover different payment methods and the pros and cons of each more in the next section.
8. File Necessary Tax Forms
The final step in the payroll process is filing the necessary tax forms and making third-party payments to pension and benefits providers.
The process for depositing employee taxes to the necessary tax collection agency varies depending on the employee’s location, so make sure to review the relevant requirements for your employees.
Keep all payroll records for several years in the event of an audit. Keep this information neatly organized, accessible, and secure in case you ever need to provide it.
What Are the Different Ways to Pay Employees?
Let’s take a quick look at some of the different payment methods for employees, and the pros and cons of each.
Paying Employees with Checks
Paying employees with physical checks is one of the most common payment methods. Checks can either be handwritten or printed payroll checks. Paying wages with checks is most common for part-time or hourly employees and allows them to instantly access their funds without needing a bank account.
Printing or handwriting checks can become costly and time-consuming, however. Printer supplies can be expensive and, like all technology, are prone to errors. Physical checks are also at risk of being lost or stolen, and having to replace them can cause headaches for everyone involved.
Paying Employees with Direct Deposit
Direct deposit is the preferred method of paying employees for many employers. The convenience of direct deposit benefits both employees and employers. It eliminates the need for employers to print and distribute checks and allows employees to receive their wages on payday no matter where they are.
If you decide to use direct deposit to pay employees, make sure you understand the timeframe for processing electronic deposits. If you miss the deadline to run payroll, your employees won’t receive their wages on payday. Also, make sure you’re aware of any processing fees for setting up and running regular direct deposits and factor these into your budget.
Paying Employees with Cash
Cash payments are also an option, although it’s become a less favored method for employers. Paying wages in cash can be an easy way to pay part-time workers without incurring additional processing fees, but the downsides will likely outweigh the benefits.
The biggest drawback of cash payments is the risk involved. Tax agencies tend to be suspicious of cash payments and are more likely to conduct audits to ensure the correct tax amounts are withheld. The lack of detailed paper trails when paying in cash also makes it more challenging to maintain payroll records which can cause further issues if you’re audited.
Paying Employees with Payroll Cards
A payroll card is a prepaid card that’s automatically loaded with the employee’s pay every payday. Payroll cards work the same as credit and debit cards, with the only difference being that the money tied to the card is exclusively from the employee’s wages. Payroll cards are a good option for employees who don’t want to use a bank account to receive their pay but want a payment method that is more secure than cash or checks.
Payroll cards often have several associated fees that may be an issue. For example, there are typically set-up and activation fees, as well as withdrawal fees when using an ATM. The costs vary by card provider and location, so make sure you’re aware of any fees if you decide to use this method.
Paying Employees with Mobile Wallets
Mobile wallets have become increasingly popular in recent years as the number of smartphone users continues to grow. Employers can have wages deposited directly into employees’ preferred mobile wallet apps. This makes accessing funds, transferring money, and making payments simple from anywhere in the world.
Like other payment methods, fees are also an issue when using mobile wallets. The fees associated with mobile wallet transfers and withdrawals are often small, but they are present regardless. Furthermore, many businesses aren’t set up to accept mobile wallet payments, so employees may need to transfer or withdraw more money to make payments.
What’s the Best Way to Pay Employees?
The best way to pay employees in your business will depend on a number of factors. Local laws and jurisdictions may prevent you from using certain methods, while others may complicate or simplify processes relating to filing and reporting taxes. Additionally, you might take into consideration employee preference when determining the best way to pay employees.
How to Avoid Mistakes When Paying Employees
Mistakes are inevitable when running a business, but gaining awareness of common errors can help you avoid trouble. Here are some common mistakes employers make when paying employees and how to avoid them.
Most countries have laws for how employers need to classify their workers. These laws dictate how workers need to be paid based on their classification. Misclassifying workers most often happens when an employer classifies an employee as an independent contractor or vice versa.
Misclassifying workers can result in your business being fined and facing tax consequences. Make sure you understand any worker classifications laws that apply to your location (or your worker’s location) and use the appropriate classifications.
Missing Payroll Tax Payments
Payroll tax payment due dates vary by location, but it’s vital to meet these deadlines wherever you are. Not making your tax deposits on time will result in fines and penalties that you should avoid. When setting up your payroll process, it’s best to use a system that automatically makes these payments by their due dates.
Not Staying Current on Payroll Laws
Laws are always subject to change, and staying up to date with changes can be difficult. What’s required by law is likely to change over your business's lifetime, so you need to follow those changes. Try to stay current with any relevant changes by subscribing to newsletters and connecting with other business owners.
Other Employee Payment FAQs
Here are a few additional questions you might still have regarding the best way to pay employees.
What Is a Pay Stub?
A pay stub, also known as a payslip, is a document that provides detailed information about an employee’s pay for each pay period. For example, it reports an employee’s gross and net pay for the period, how many hours they worked, their hourly wage, the amount of taxes and other deductions, and more.
Some countries and regions require employers to provide their employees with a pay stub. Even if they’re not required, pay stubs are a good way of being transparent with your employees so they can ensure they’re paid correctly.
How Do You Account for Overtime?
Overtime pay can cause confusion for many businesses, as the pay rate for overtime usually changes depending on the number of hours worked, local regulations, and the industry.
Typically, overtime pay is accounted for by applying the appropriate overtime pay rate to the employee’s overtime hours. This ensures that they are fairly compensated for their time after it exceeds regular working hours.
What Should You Do If an Employee Doesn’t Receive Their Payment?
If an employee doesn’t receive their paycheck, it can be a frustrating and anxiety-inducing situation. Many people schedule various payments based on when they get paid, so if they don’t receive their pay, it can lead to serious inconveniences for them.
If an employee tells you they haven’t received their payment, start by reassuring them that you’re working on getting it taken care of as quickly as possible. Then, double-check the information that you have. There could have been an issue with their account number for direct deposit, or an issue with the registration of a payroll card, for example.
In most cases, finding out why an employee didn’t receive their pay is fairly straightforward. Remember to be understanding throughout the process, as it can be very stressful; however, fixing the issue as quickly as possible gives your business the opportunity to demonstrate its dedication to your team.
How Do You Account for Paid Time Off?
Paid time off can be accounted for in various different ways. The pay will typically depend on the type of leave an employee is taking. For example, maternity leave may be paid at a lower rate; other types of leave, such as annual leave or sick leave, might be paid at the employee’s regular rate of pay.
Establishing a payroll policy outlining how employees are compensated during time off is essential to remaining compliant, as well as maintaining a transparent relationship with your employees.