Having a clear and reliable payroll is crucial for maintaining employees and growing your small business. How it’s structured impacts everything from your relationship with your employees to your income taxes. Make sure you get started on the right foot for long-term success.
Before you start interviewing for your vacant positions, obtain an employer identification number (EIN) through the IRS. Your EIN is also known as an employer tax ID. You’ll use it to file taxes and provide employee information to government agencies.
Each state and county have individual regulations and may require you to obtain additional identification. Research ordinances at the local level to make sure any system you set up will comply from the very beginning.
Identify Employees Correctly
Worker classification determines if you need to withhold taxes and pay social security on an individual. It’s important to distinguish between an employee and an independent contractor because you have tax obligations when it comes to an employee. Independent contractors pay their own self-employment tax based on their wages.
Check with your tax professional or financial advisor to be sure, but most of the time it comes down to the degree of control you have over the person doing the work. If you tell the worker what tools to use, where to buy materials, what hours to work, and where the job needs to be done, they’re probably classified as an employee. If you just have a say in the outcome but the worker uses their tools, facilities, methods and background knowledge, often they’re classified as a contractor.
For employees, you’ll need to pay the following benefits:
- Social security taxes
- Worker’s compensation
- Disability insurance
- Leave benefits according to the Family and Medical Leave Act
- Unemployment insurance
Your business may also decide to offer optional benefits like group health plans, 401k, or pension plans. There may be additional legal requirements even if a benefit is optional.
Gather Employee Documentation
As you hire employees, they are required to fill out a W-4. This information tells you how much to withhold from their check each pay period for federal taxes. Research which records you’re responsible for maintaining and for how long after an employee leaves you should keep them.
Set Up Your System
Most states prefer a bi-monthly tax pay period, but you may have the option of setting it up monthly. You’re responsible for withholding taxes for every employee who works for you during each period, even if they didn’t work the whole two months. Schedule pay periods to coincide with IRS withholding to simplify bookkeeping.
Complete Your Payroll Year Before Business Taxes
Part of ending the year right is preparing a report of all the taxes you withheld from workers and paid to federal and state agencies. By January 31, each employer should file Wage and Tax Statements, so employees can file their own returns. Form 941 shows how much you paid Social Security and Medicare, and Form 940 contains information on how much you spent on unemployment. Send Form 1099 to any contractors you paid more than $600 and file an additional copy with the IRS.
The process requires careful planning and consistent implementation, but hard work at the beginning will pay off when payroll runs efficiently. Diversified Management Services helps businesses streamline payroll, accounting, and bookkeeping for smooth business management from the start.