Small business owners juggle numerous aspects of the business, from growing the company, getting clients, and hiring and managing workers. In between all these duties, they may forget about payroll. Adding workers is a crucial step in the growth of a small business, and ensuring they get paid as per the agreement, on time, and in compliance with the law plays a role in sustaining business growth. However, payroll is not an easy task for many small business owners. It’s time consuming and involves more than just paying the workers.
This beginner’s guide to small business payroll will help all small business owners get their businesses up and successfully run their payrolls while ensuring the back office runs smoothly.
Get EIN (Employer Identification Number)
Before making any decisions concerning the best payroll service, small business owners need to register as an employer and acquire an EIN. This number is specially designed for IRS purposes and identifies the business when the owner submits information concerning the employees to state and federal government agencies. Some of the examples of this information include gross income and taxes cleared on their behalf. Entrepreneurs can apply for this number through the IRS directly. Although fax and mail applications are acceptable, an online application is the easiest.
Register for EFTPS
Entrepreneurs can only deposit business taxes using the EFTPS (Electronic Federal Tax Payment System). Before paying any taxes, small businesses owners need to register for EFTPS, which they can do online. They can pay taxes either through direct deposit for free or through credit card, with some charges.
Distinguish an Independent Contractor From an Employee
Worker classification determines how employers pay income, social security, medical care, and unemployment taxes, so small business operators need to know the difference between independent contractors and employees. In addition, employers need to determine the salary status of their workers. They need to differentiate those who’ll have a fixed salary from those who’ll receive wages.
Payment Period and Method
In most cases, the payroll schedule varies from monthly to bi-weekly or weekly basis. Although workers prefer a particular pay schedule, business owners should base this decision on cash flow and other factors that make the small business payroll easier. The common payment methods include a paycheck, cash, direct deposit to the worker’s bank account, or payroll card.
Collect The Required Employee Data
Before managing the payroll, there are some forms and information concerning the workers employers need to collect. Employees need to fill Form W-4, a federal tax withholding form that allows business operators to calculate the accurate withholding tax. In addition, all workers need to complete Form I-9 to verify they’re legally authorized to work in the United States.
Develop Payroll-Related Processes
To issue correct paychecks, employers will require a strategy of tracking employee hours. There are numerous tools available for this use, from sign-in sheets to software that traces employee activity on mobile devices. It’s also crucial to form policies for paid overtime, time off, and other benefits. On the other hand, employers must implement a process to ensure that deductions for taxes, benefits, etc., get paid to the correct agencies on behalf of their workers.
Calculate and Pay Payroll Taxes
Employers are responsible for making a small business payroll tax and generating specific reports, which are due either annually or quarterly. Business owners can use the IRS and state tax office resources to ensure all taxes and reports are appropriately handled.
Choose a Payroll Platform
Once the business operator registers with the IRS and other relevant agencies, it’s time to select the model of managing the small business payroll. There are three options to choose from: manual payroll, payroll software, and outsourcing payroll services. Each model has its pros and cons, so it’s imperative to do comprehensive research to avoid issues.
Generate the Payroll
Once the employer enters employees’ personal information into the small business payroll system, they can now produce the first payroll run. The employer can use the timekeeping tools for hourly workers to determine the hours each employee has worked. Salaried workers don’t report their hours. They receive the same amount every week.
Retain Payroll Records
Certain small business payroll records need to be retained for review by the IRS, the Department of Labor, or a state agency. As a rule of thumb, employers must keep records for actively employed people, irrespective of the period they’ve worked. Most records have to be reserved for a particular period after the contract gets terminated.
An accurate and timely small business payroll contributes to the growth of a small business. Payroll errors demotivate employees, while tax errors can lead to heavy fines and penalties. Thus, small business owners should consider how they’ll handle their payrolls to avoid pitfalls.