Did you know that small business owners spend roughly 5 hours every pay period just processing payroll?
If you’re a small business owner that is about to hire employees, you need to figure out how to process payroll as fast as you can. You also have to limit mistakes at the same time, because that could cost you more money and time.
You want to make sure that you set up your payroll is set up right the first time. Read on to learn how to set up payroll for small business.
1. Get an Employer Identification Number
You need to get an employer identification number (EIN) from the IRS. You can get one in a few minutes on the IRS website.
This is used to identify your business for tax reasons. You need one when you open a business bank account or hire employees. This is the number that the IRS will use to make sure you paid payroll and business taxes.
2. Correctly Classify Employees and Contractors
The way we work and hire employees is changing. Workers want more autonomy and are becoming freelancers or independent contractors. Employers benefit because they can pay independent contractors, who would be responsible for paying their own taxes.
The trouble with this scenario is that workers are being misclassified as contractors when they’re really employees. Small and large companies are getting sued by states that are accusing them of misclassifying workers to avoid payroll.
You want to make sure that you always classify your workers properly to avoid scrutiny and fines.
3. Decide Pay Periods
Part of your payroll process depends on having a system that outlines when you’ll pay people. Some employers chose to pay employees monthly, every other week, or weekly.
You want to have a process that works for you and your employees now. You also want to keep in mind the time to process payroll as your company grows.
4. Choose a Payroll Processing System
A payroll processing system is a vital part of setting up payroll. This allows you to easily calculate withholdings, cut checks, and print them.
The easiest place to start is to have a paycheck template that you can use. This will speed up the process to cut checks and reduce mistakes.
5. Create A Documented Payroll Process
When you have only one employee, it’s easy to manage and communicate payroll expectations. When you have more than one employee, things can get misunderstood and can create big problems.
That’s why you need to have your payroll process documented. Employees will know what is required from them, the deadlines, and when they can expect to get paid.
6. Collect Forms From Employees
As you hire employees, they need to fill out Form W-4 that will tell you how much income tax you should withhold from their paycheck.
They also have to complete Form I-9 that shows they can work legally in the U.S. They may also need to fill out state income tax forms and a job application.
Every pay period, you’ll need to collect timesheets and vacation requests to make sure that you calculate their earnings correctly.
7. Remember to Distribute Pay Stubs and W-2 Forms
Once you cut checks or sent payments via direct deposit, you may not be done with payroll. You may still have to distribute pay stubs that show how much was earned and withheld.
The laws are different in each state, so you want to check with your state’s labor department to find out what your obligations are.
One thing that’s without question is that you do need to distribute W-2 forms to your employees by January 31 every year. A copy of the W-2 also gets sent to the IRS.
Read More: Is It Time to Get New Payroll Software?
8. Keep Your Payroll Records
You have to maintain excellent records of your employee documents. This includes all payroll records, payroll taxes, and W-4 forms. The IRS recommends that you keep these records for about 7 years in case your tax records get audited.
The Department of Labor recommends that you maintain records for about 4 years.
9. Don’t Miss Deadlines
Payroll taxes are a big responsibility for small businesses. The IRS doesn’t mess around with payroll taxes, because that’s what helps fund Social Security and Medicare. These programs are essential for many elderly people in our society.
As a small business owner with employees, you have to withhold 1.45% for Medicare and 6.2% for Social Security from every employee’s gross earnings. You then pay equal those amounts and forward the funds as payroll taxes to the IRS.
This is usually done on a monthly basis on the 15th of every month. For example, you’d pay your payroll taxes on July 15th for taxes withheld in June.
Missing this deadline will result in late fees and interest on the amount due to the IRS.
10. Correct Mistakes ASAP
There will be times when mistakes get made. Typos happen, as do miscalculations. If an employee comes to you saying that there’s a mistake on their paycheck, then they should be able to show you the error.
Then, it’s up to you to make the correction as soon as possible. Not correcting the mistake could lead to a loss of trust with the employee or they could report it to the labor board.
Your business could be under investigation for labor violations because you didn’t act quickly.
How to Set Up Payroll for Small Business
It’s not hard to know how to set up payroll for small business. You do have to do your research into payroll and labor laws so you can understand what your responsibility is.
Once you know those basic requirements, it’s up to you to set up a system that works for your business. Invest in tools that will limit payroll mistakes and have a process in place before you hire your first employee. That will set the expectations up for you and your business.
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