Setting up a small business – Here’s how to manage payroll
It’s thrilling to own and manage a business, but when it comes to payroll management, you realize how daunting things can be. Any mistake on payroll can create serious financial trouble and directly impact your taxes. Managing payroll on your own means you have taken on the responsibility to withhold and deposit payroll taxes, among other things. So, here’s a concise guide to understanding how to manage payroll for all small business owners.
Collect payroll information
If you’re a small business owner, the first thing you need to learn is setting up a payroll. To do this, you need both the employer and employee information.
- Employers need to apply for an Employer Identification Number (EIN) before they start hiring. EIN is necessary for tax documentation purposes. Then, you’ll need to register with the Electronic Federal Tax Payment System (EFTPS) to pay federal taxes.
- Depending on your state, check whether you need employer ID numbers for state and local governments and register at the state’s new hire reporting website.
- Decide the pay frequency and the payment method beforehand. You might need the employees’ bank account details to make the payments.
- Know your employee’s salary status, for which you must check whether they must be paid overtime wages.
Collect employee information
Before an employee starts working, they need to complete certain paperwork:
- Existing employees must fill out Form W-4, which is the Employee’s Withholding Certificate and determines the federal income tax amount you need to withhold from them.
- New employees need to submit Form W-4 and Form I-9, which is Employment Eligibility Verification that confirms their eligibility to work in the country.
- Collect information on benefits like health insurance and retirement plans so that you know how much they want to contribute to these accounts.
Choose a payroll system
- Manual payroll: It’s a cost-effective way to manage payroll, but it’s susceptible to serious mistakes throughout the process. You are responsible for figuring out the tax amounts to withhold and for sending taxes to the appropriate agencies on time.
- Outsourcing payroll: This is the best payroll management method for a small business owner to save time, but it can be expensive. You can hire a payroll consultant to help withhold and deposit taxes.
- Payroll software: This is the most preferred system for small businesses. It’s affordable, accurate, and quick, and you can choose from several payroll software for small businesses available in the market.
Once you’ve chosen a payroll system, you’re ready to start managing it. Running payroll is always the same process: enter the employee work hours, account for any overtime, withhold taxes, and pay via the chosen method.
Handling taxes is another important aspect of learning to manage payroll for a small business. You must withhold, deposit, and report specific taxes from each employee’s gross wages. These include:
- Federal income tax
- State and local income taxes (if applicable)
- FICA tax (Social Security and Medicare taxes)
You must keep payroll records for each employee, including documents like the employee’s Form W-4, total hours worked each workweek, and pre-tax and post-tax wages. You can check with the Department of Labor (DOL) for information related to payroll record retention.