Starting a business is an exciting venture. Hiring employees only amplifies the feeling. But with employees, comes payroll. Here are some steps to take to ensure a properly set-up payroll system.
Apply and obtain your Employer Identification Number (EIN) online. This is the first step in any true business. Without an EIN, you cannot hire employees. The EIN is integral for reporting taxes and other important documents to the Internal Revenue Service (IRS).
Apply and obtain state and local identification numbers - if your state requires them. Some states do not.
Choose a pay period for your future employees. For example, will you pay them on a weekly, bi-weekly, semi-monthly or monthly basis?
Properly identify your employees. A common error some businesses make is employee misclassification. The difference between an independent contractor and an employee is important. Reporting it inaccurately results in heavy fines. With an employee, you control his or her work, and where he or she does it. An independent contractor holds these reigns.
Ready yourself for employee paperwork. Every employee needs to fill out Form W-4 to determine how much tax to withhold from his or her paycheck.
Determine other aspects to payroll such as: time and attendance, exempt vs. non-exempt statuses, paid time off benefits, health care plans, and more.
Choose a payroll system. Payroll is complicated, so many business owners choose a third party vendor to help streamline their practices. You can run payroll in house, as well, but with more employees, the chance for errors increases.
Build your own payroll system. Don’t want to run everything manually and don’t want to outsource? With the right technology - a tax engine to calculate every feasible payroll tax, a tax look-up system to determine each employee’s specific taxes, and a withholding forms program to onboard employees correctly for day one - you can run payroll with your own system in tow.
Keep records. Form W-4 must be on file for all active employees and for three years after an employee is either fired or quits. Employers must also keep copies of Form W-2, and records from their tax deposits.
Report payroll taxes. You must deposit federal income tax withheld for both the employee and your business. This includes Social Security and Medicare. Employers must also report Federal Unemployment Tax (FUTA). To know when you must report, use IRS’s Publication 15.
Rejoice! You’ve successfully set up and ran payroll for your business.