Doing payroll may not be your favorite part of running a business.. however, as soon as you hire your first employee, you’ll need an effective payroll system.
Below, we walk you step by step through each process and which option might be best for your business. Remember, this post is for educational purposes only. For specific advice, be sure to consult with a professional.
Step 1: Understand the State and Federal Employment Laws
The payroll process begins with understanding various state and local laws that apply to small businesses. Before you set up payroll for your company, you need to get familiar with relevant laws in the U.S. Different federal and state regulations apply in this case, such as the minimum wage laws, employment tax rates and, the Family and Medical Leave Act.
An excellent place to start is the U.S Department of Labor website. Here, you can access different resources to help you understand and comply with federal employment laws. You also need to know the payroll rules regulating local businesses in your state.
Step 2: Get an Employer Identification Number
Before you do payroll yourself, make sure you have your Employer Identification Number (EIN) ready. EIN is a unique nine-digit number that identifies your business for tax purposes. While its main purpose is to help you with federal income taxes, it also comes in handy when opening bank accounts, credit cards, loans, local taxes, or setting up payroll.
If you don’t have an EIN, you can apply for one on the IRS site.
Step 3: Collect Employee Tax Information
To complete the payroll setup, employers need to collect some details from new hires and update the payroll information of existing employees. You need to collect relevant tax information from your employees. This means having all employees fill out a W-4 and an I-9. If you have a contract or freelance worker, you’ll have to collect 1099s. On these payroll forms, employees provide legal information about their work status, elect to take out certain deductions, and fill out other important information.
You can read more about submitting W-2s and I-9s to determine what’s required of your business.
Step 4: Choose Your Payroll Schedule
A payroll schedule is a calendar that shows how often a business remunerates its employees. There are four types of pay schedules: weekly, biweekly, semi-weekly and monthly. All four schedules have their advantages. Carefully consider how often you’ll pay employees. You can find labor guidelines by visiting your state’s labor department website.
Step 5: Draft a Payroll Policy
You should create a payroll policy or employee handbook. An employee handbook is a formal document that spells out the different guidelines for managing business payroll, including the payroll schedule, employee benefits, and payroll method.
There are a few key things you should include in your employee handbook, such as:
Other benefits and compensation
A detailed employee handbook helps companies process payroll effectively. Ask an employment law expert to review the document and make sure everything’s in place before sharing it with your workers.
Step 6: Calculate Net Pay & Run Payroll
Once you’ve calculated your employee’s gross pay and withheld the necessary taxes, calculate the amount they get to take home.
After you know each employee’s net pay, you can run payroll and deposit funds into their bank accounts or send them a check in the mail. You can also make payments using convenient pay cards to save money.
Step 7: File and Report Payroll to Tax Agencies
After you issue your payroll checks, make sure to remit payroll taxes withheld and accrued to both IRS and state and local agencies. IRS offers several resources to help businesses with employment taxes, including an online payment portal, e-file, and direct deposit options.
Step 8: Hire an Expert or Bookkeeping Company
Even if your company is small, processing payroll can be challenging. It takes time to gather employees’ information, calculate each employee’s gross and net pay, and ensure you’re withholding the right amount for state and federal taxes each pay period. It also takes a lot of time and effort to track payroll records in an organized and efficient way.
The person you hire or company to help with payroll will ensure that:
Time sheets are accurate
Payroll deductions and taxes have been entered
You meet federal, state, and local regulations
Payroll is processed on schedule
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