As your small business grows, so does your staff. And once you have employees on board, you are faced with the task of managing payroll. If you’re like most small business owners, it’s likely that payroll isn’t your area of expertise. After all, you’re probably more focused on the products or services you provide than the operational details of business ownership. But the fact is, as your business grows, so do your legal and regulatory obligations.
For those with little to no knowledge of payroll, the process can seem daunting. Making sure paychecks are calculated correctly, figuring out payroll taxes, and staying on top of state and federal regulations can all be overwhelming. But managing payroll doesn’t have to be difficult. With a bit of basic knowledge and a little planning, it’s possible to streamline your payroll process.
Payroll Basics for Small Business Owners
Whether you have one employee or one hundred, managing payroll is one of the most important responsibilities of a business owner. But what, exactly, does “managing payroll” mean? Yes, it involves cutting checks for employees. But there’s much more to it. Managing payroll also means classifying employees correctly, withholding estimated taxes and deductions, accurately calculating employee pay, and paying payroll taxes.
How to Classify Employees
Employers can face steep penalties if employees are not classified correctly. Classifications include full time, part time, exempt, or non-exempt. Independent contractors are not considered employees, but their earnings must be reported. Factors that determine an employee’s classification include the number of hours worked, the specific job duties, the duration of the work, and the degree to which the employee has control over their work, among other factors.
Payroll Withholdings and Deductions
Another responsibility of employers is withholding funds for income taxes and deducting an employee’s share of benefits contributions. A summary follows:
- Tax Withholdings: For federal taxes, the amount withheld is determined by the employee’s filing status, the number of dependents, and other factors. Most states also require withholdings for state income tax.
- Employee Deductions: Deductions fund benefits such as health and life insurance premiums, 401(k) contributions, and health savings accounts. After-tax deductions include Roth IRA contributions, charitable contributions, union dues, and wage garnishments.
How to Get Started with Payroll
The first step in getting started with payroll is to obtain an Employer Identification Number (EIN). Employers must also register with their respective states, some of which issue State EINs (SEIN) or other state tax identification numbers.
Next, employers must collect information from each employee via their W-4, Employee’s Withholding Certificate and I-9 form, which verifies eligibility to work. For independent contractors earning more than $600 a year, a W-9 form, Request for Taxpayer Identification Number and Certification, is used. Employers must also obtain health insurance and retirement plan documentation forms and bank information (for direct deposit).
Calculating Employee Pay
Employee pay includes more than just earned wages or salary. The final amount can also include overtime pay, bonuses, commissions, tips, reimbursements, and unused paid time off. Employers must also determine a pay schedule, whether weekly, bi-weekly, monthly, or semi-monthly. Most states have laws determining the frequency of pay.
Filing Payroll Taxes
Employers are required to withhold and file payroll taxes. This includes Federal Insurance Contribution Act (FICA) taxes, which funds Social Security and Medicare; Federal Unemployment Tax Act (FICA), which funds unemployment insurance programs; and state and local payroll taxes. In addition, employers are required to pay state unemployment taxes (SUTA) and worker’s compensation insurance.
Employers must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return and Form 941, Employer’s Quarterly Federal Tax Return. Form 940 is due Jan. 31 for the prior year, while Form 941 is due April 30, July 31, Oct. 31, and Jan. 31 (for the fourth quarter of the prior year).
Outsourcing Payroll Management
Many small business owners find the task of processing payroll overwhelming. Luckily, there are solutions. Payroll software not only issues paychecks, but it also automatically files taxes and can help ensure businesses remain compliant. Another option is to hire an accounting professional to take on these responsibilities.
Payroll Management for Small Business Owners
No matter the size of your business, managing payroll is an essential responsibility. Although the many tasks involved in payroll can seem difficult to navigate, the right tools and knowledge can help you streamline the process while staying compliant. Whether you do it yourself, use payroll software, or outsource payroll services, understanding the basics can help avoid headaches down the road.
CorpNet offers business formations, filings, state tax registrations, and corporate compliance services in all 50 states. Express and 24 hour rush filing services available upon request. Click here to learn more.
Image: Canva
Read More
Nellie Akalp