Let’s start from the very beginning – setting up payroll for your small business. The moment you hire an employee, you have to pay them, right? In our ultimate guide to running payroll, we discuss the steps to get everything set up correctly.
Please note that many states and localities require special forms, so be sure to check your location-specific requirements prior to setup.
10 Steps to Help You Set Up Payroll
1. Identify your company.
Obtain an Employer Identification Number or (EIN). This is often referred to as an Employer Tax ID or as Form SS-4. This number is necessary for reporting taxes to the IRS and information about your employees to state agencies.
Click here to apply for your EIN.
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2. Are local IDs needed as well?
Some states or local governments require you to obtain ID numbers to process taxes.
3. Correctly classify your employees.
With such diverse employment options for your small business, it’s important that you know the distinction between an independent contractor, freelancer, and an employee.
This will directly affect withholding income taxes, withholding and paying Social Security and Medicare taxes, as well as unemployment taxes. The IRS breaks down the difference here.
4. Forms W-4
Your employees are required to complete Federal Income Tax Withholding Form W-4 and return it to you so that you can withhold the correct federal income tax from their pay.
5. Form I-9
The federal Immigration Reform and Control Act (IRCA) requires employers to hire only individuals who may legally work in the United States.
Form I-9 is required for all U.S. employers to verify the employment eligibility and identity of each employee hired to work in the U.S. (including U.S. citizens). Employers must have a record of this for each employee.
6. Pay period determination.
When are you going to pay your employees? Sometimes, the determination is made by your state’s law.
The IRS requires that you withhold income tax for that time, even if your employee doesn’t work full time.
But, let’s say you have an employee who only works 10 hours at $9 per hour. Chances are they make so little that no federal income tax would be withheld. They would still be required to have Social Security and Medicare, along with any mandatory state or local taxes, withheld.
7. Get organized with compensation terms.
It’s vital that you track employee hours, overtime, paid time off, and other business requirements while complying with the federal Fair Labor Standards Act (FLSA).
In addition, you must appropriately calculate other deductibles such as health plans or retirement contributions (if you offer those options) and ensure they’re paid properly.
8. Run payroll.
When you get to this step, that means all forms and information have been filed correctly. Determine if direct deposit is right for your business, or if payroll cards or printed checks are the best option for you and your employees.
9. Prioritize recordkeeping.
Federal law requires that you keep Forms W-4 on file for all active employees and for four years after an employee is terminated.
Check with your state because state laws may require that you keep other records as well. Here is some general information on how long to keep tax records around.
10. Reporting taxes.
Running payroll also comes reporting payroll taxes. This tax guide from the IRS provides guidance on the federal tax filing requirements.
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Disclaimer: Please note that this Q&A is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.