No matter how many employees you have, it is essential to set up a payroll system in order to manage your responsibilities and avoid IRS penalties. Plus, making sure your employees get paid correctly and on time is essential if you want to keep them happy and motivated. To implement a new payroll system, here are seven steps to follow.
1. Take Care of EIN Responsibilities
Prior to hiring, contact the IRS and get the EIN for your business. EIN is an abbreviation for Employer Tax ID, and it’s your job as the business owner to report tax information to the IRS and state agencies. To avoid IRS fees and penalties, be sure to get an EIN before hiring anyone. You can apply for EIN easily online. You may also need the employee ID number obtained by the state or local government-affiliated. These are required for tax processing.
2. Understand the Fine Print
When you hire people, be clear on the difference between independent contractor rights and those of employees. Legally, the two differ, and these differences will impact the ways you withhold taxes. If you’re working with an independent contractor, freelancer, or musician, you’ll need to inquire further on the ways these self-employed workers receive payment. Lately, more and more apps have been used to receive payment online for project-based assignments, but you’ll want to be aware of any preferences.
3. Fill Out Tax Forms
You’ll also need to collect certain information on new hires. During onboarding, have new employees complete their W-4s. Double-check that the information is correct before using it to withhold the right amount of federal income tax. These steps are mandatory for all businesses with employees.
4. Determine the Pay Period
So, once you have the taxes and payment figured out, how do you do payroll? Beyond manual application, you’ll need to set up the pay period you’ll be using. The IRS demands the withholding of income tax for the period decided, regardless of whether the employee works the entire period. Standard periods include monthly or bi-monthly, but they can also be influenced by state law. Check the specifics for your area and know that bi-monthly payments are most common.
5. Set PTO Protocol
Take the time to think through your PTO policies, then explain to employees how you plan to go about paid time off, hour tracking, overtime, and other factors that influence employee compensation. Include any deductibles and indicate how they will be subtracted from paychecks. This is also a good time to cover health premiums and retirement funds. You want to ensure that you and your employees are on the same page.
6. Pick and Run Payroll System
Most often, you’ll choose from either in-house or outsourced payroll systems. Remember that it is your job to report and pay any and all payroll taxes as the employer. If you’re unsure which system to go with, ask around and get a feel for what other organizations use. After selecting your system, you can start running payroll. Your information may be passed over to your accountant or not, depending on how you choose to set it up. Fortunately, there are many technologically advanced payroll systems that can help make running payroll easier.
7. Keep Active Records
The IRs and state agencies require that you keep files of all documents pertaining to tax withholding information. This information should be stored for three years after termination. Additional information should also be kept to file for payroll tax reports. Regular submissions to the IRS are required. Go online to learn of the specific quarterly or annual deadlines.
Establishing payroll for your small business will take research and time to develop. Never skip steps that require gathering identification information, as you will need this later to fulfill your responsibilities as the employer. If you follow these guidelines, your payroll setup will be much easier to implement.