As a small business owner, you have grown from a one-person company to having several employees. Whether part or full-time, you have taxes and other factors to consider when cutting checks for the staff. No matter the size of your organization, payroll can become complicated. While larger businesses often have a dedicated payroll department, you may handle this process yourself or partially outsource.
Incorrect payroll can have major ramifications, from low employee morale and high turnover to IRS penalties. As you look to streamline payroll for your small business, get started with the following tips.
Basics of Setting Up Payroll
For any business, payroll involves multiple moving parts. If you have just recently hired employees, make sure your system is compliant with the IRS. This entails ensuring:
- Your workers are appropriately classified. A common scenario leading to penalties, you label full-time workers as contractors. If you’re unsure about these classifications and how they affect taxes, check with the state Department of Labor. Misclassification can result in your business owing back taxes and wages.
- Your business has an Employer Identification Number (EIN). Essentially a Social Security Number for businesses, an EIN helps you obtain certain licenses, offer retirement plans, open a business bank account and file payroll taxes. You may need both state and federal-level EINs.
- You have registered for an Electronic Federal Tax Payment System® (EFTPS). This free service allows you to pay federal taxes online. To get started, you’ll need a business bank account and routing number, an EIN, name and address.
1. Get Organized
Develop an internal system to keep payroll organized and avoid IRS penalties. Businesses are required to keep employment tax records for a minimum of four years and the U.S. Department of Labor requires businesses to have payroll tax data on-hand for at least three years. Each state may also have their own requirements. Considering these expectations:
- Make sure any payroll data you have is organized by year and easily accessed.
- Keep all information in a location less prone to damage from fires, flooding and other perils. A storage site may be recommended.
- Back up electronic records from your payroll software, storing them on a separate device or digital platform like cloud storage.
2. Understand Deductions and Taxes
After you have this framework in place, understand the taxes that need to be withheld or reported for your staff. This typically includes:
- Federal income tax
- State and local income taxes
- Social Security and Medicare taxes, also known as FICA
- State Unemployment Tax (SUTA)
- Federal Unemployment Tax (FUTA)
3. Establish a Schedule
Consider the following factors for issuing checks and reporting taxes:
- Deadlines: Keep track of big deadlines, like when to submit payroll information to a third-party resource and file your W-2 forms filed.
- Evaluate your budget: Your business might need additional help but make sure that you’re able to pay your workers and respective taxes while balancing your budget with wage and labor laws.
- Frequency: Determine how frequently you’ll issue checks, taking into account both state and federal laws. Also ensure that your employees receive their checks on time.
- Maintain a profit and loss statement: Understand your business cash flow, which can further indicate if you’re overstaffed, have room to hire or are overpaying vendors.
4. Outsource or In-House?
As the final step in setting up payroll for your small business, determine how you’ll be doing these calculations. Common solutions include:
- Automated payroll: This software-based system should ideally be cloud-based for anytime, anywhere access. Payroll software can save time and result in fewer errors.
- Manual: While this approach can be more economical, it’s also more error prone, takes longer and requires knowledge of bookkeeping and accounting practices.
- Outsourcing: A third-party service takes your information to process and issue paychecks to employees and manage taxes. Currently, based on data from the
National Small Business Association, just over 40 percent of small businesses outsource payroll and roughly 20 percent choose to keep all operations in-house.
Why outsource your payroll?
- You may find you don’t have the time to manage payroll, even with software
- A third-party service often has the tools in place to identify fraudulent activity
- You want to prioritize accuracy and avoid IRS penalties
- You’ll receive guidance from certified public accountants and bookkeepers on deductions, taxes and have a second set of eyes on the data you provide
Operating Payroll for Your Small Business
Once you have a payroll process up and running, you’ll further need to think about:
- Tracking employee hours: Especially for employees paid an hourly wage, consider a time-tracking system that indicates when and how many hours they worked.
- Updates: Even if you outsource payroll, keep abreast of tax and wage law changes that could affect what gets drawn from employee paychecks and update your staff.
- Check everything: Make sure that all expected and actual payroll amounts align with every pay period. Check rates, overtime hours, tips, withholdings, deductions and hours worked and investigate any discrepancies, even if you’re using software.
- Periodically update employee records: When information changes, your records and payroll system need to reflect this. Provide forms to change an address, name, marital status or dependents, as these factors can influence deductions and taxes.
- Think about how you’ll manage benefits: While the EFTPS® can help you manage federal taxes, you still need to think about health insurance, retirement plans and their respective payments. You can make these payments directly or have your payroll provider issue them.
Need assistance with payroll for your small business? Explore our business services and contact Ion Bank to get started today.