Out of the more than 23 million small businesses in the U.S., each and every one is consistently adding new jobs to local economies.
If you’re at the point where you’re ready to start adding to the statistic (and to your staff), the process can get, well, taxing.
There are specific hiring procedures, onboarding policies and of course there’s that part where you actually have to pay your employees. The next step? Setting up a payroll system. This enables your ability to stay on top of federal, state and local withholding and tax requirements.
The following checklist explains the basic elements needed when setting up a payroll system for your small business.
Identify Your Company
First things first, you’ll have to 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.
Are Local IDs Needed as Well?
Some states or local governments require you to obtain ID numbers to process taxes.
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, a 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.
Form W-4s
Your employees must complete Federal Income Tax Withholding Form W-4 and return it to you so you are able to withhold the correct federal income tax from their pay.
Pay Period Determination
When are you going to pay your employees? Sometimes, this determination is made by your state’s law. The IRS requires that you withhold income tax for that time period even if your employee doesn’t work the full time. BUT, let’s say you have an employee who only works 10 hours making $9/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.
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. 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.
Run Payroll
When you get to the step of actually running payroll that means all of your forms and information have been filed in the appropriate spot. Determine if direct deposit is right for your business or if payroll cards or printed checks are your current best option.
Get Really Good at Recordkeeping
Once you’ve completed all the necessary steps with W-4 forms, you can’t just destroy all evidence that it ever existed. Federal law requires that you keep W-4s on file for all active employees and for four years after an employee is terminated. State laws may require that you keep other certain records as well.
Reporting Taxes
With running payroll comes…reporting payroll taxes. This tax guide from the IRS provides guidance on the federal tax filing requirements. As for local or state taxes, check here.
Outsourcing Options
Feeling overwhelmed by all of the things that go into successfully (and legally) setting up and running payroll for your small business? You’re not alone. If this seems like a lot to handle, one of the smartest decisions you can make is to outsource this critical business function.
Let PrimePay Help.
PrimePay can partner with you to offer support throughout the entire employee lifecycle. Learn more about how PrimePay can help you streamline Payroll & Human Resources processes.
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