As your business grows, you'll eventually reach a point where you can no longer do it all by yourself. Hiring employees will become necessary for any flourishing small business, and when that time comes for your company, you’ll need to set up payroll – which requires far more than just issuing paychecks.
When paying your employees, there are many federal, state, and sometimes local requirements regarding how payroll is administered. Understanding the ins and outs of the payroll process is crucial for keeping your small business in compliance with these ordinances. Below, learn about what you need to know about payroll taxes, relevant tax forms, and other important considerations for processing your small business’s payroll yourself.
Paying your employees involves several main components, including properly issuing paychecks according to employee preference and state law, filing the correct tax forms, and withholding the correct deductions from your employees’ pay.
The term “payroll taxes” comprises state and local income taxes when applicable, as well as Social Security and Medicare taxes you are required to withhold from salaried employees who receive W2 forms from your company. You may additionally need to withhold state unemployment insurance taxes, depending on where your business is based. Note that for 1099 employees, you do not need to withhold payroll taxes.
To properly execute payroll, you may need to work with some of these tax forms:
When running employee payroll for a small business, you will need to adhere to the following steps.
Make sure that all new employees fill out the following forms:
From the moment your business brings on its first employee, your company needs an employer identification number (EIN). Without an EIN, your business cannot properly process taxes or receive valid tax identification. To obtain an EIN, file an application with the IRS and be prepared to provide:
You may also need an employer identification number issued on a state level. Check with your state authorities for more information.
How often you plan to issue paychecks is a key consideration both for your employees and your own accounting. Depending on where your business is based, whether your employees are salaried or hourly, and your industry of operation, your business may be required to pay employees weekly, bi-weekly, monthly, semi-monthly, or at some other frequency. Check your state regulations to determine the payroll schedule appropriate for your business.
Your employee payroll tax obligations may differ depending on how you categorize your employees. You should thus be certain to classify your employees properly when you set up your company’s payroll process. The seven most common employee types are:
The first four steps of the payroll process are completed at the outset of launching your business or as part of onboarding a new employee. Calculating and paying taxes are regular, recurring business operations that happen every time you run payroll for eligible employees in your small business. To calculate taxes, determine the number of:
Once you have tallied all employee time worked, you must then multiply your employees’ hourly wages for the period by the number of hours worked. For salaried employees, assume a constant rate of payment every pay cycle unless you need to deduct wages for days taken off or add more wages for overtime hours. The amount determined from these calculations is known as gross pay.
Once gross pay is determined, apply the following deductions:
The amount you pay your employees after these deductions is known as net pay.
In addition to gross and net pay determinations, you must calculate taxes that your business pays independently of employee payroll. These taxes are primarily Federal Unemployment Tax Act (FUTA) taxes, often known more simply as unemployment taxes. Instead of deducting these taxes from your employees’ paychecks, you pay them directly, with rates that vary based on your company’s size and the incomes you pay your employees.
Once you have calculated the taxes your business owes, you must pay them by your deadline, which varies based on your business classification. Most taxes can be paid online by registering for an IRS Freefile Fillable Forms account.
You must pay taxes every time your company runs payroll, and you must file tax returns quarterly and annually. Use these forms to pay your required taxes:
Alongside your tax payments, you must file the aforementioned forms. You must also file certain other forms annually:
After filling out the required tax forms, you must also prepare and submit your company’s required annual tax filings. Only after you do so can you consider your payroll report for the tax year complete.
If doing payroll yourself seems overwhelming, you have other options. You can use a payroll software platform, also often known as a payroll service, to streamline and automate your employee payments and tax filings. You can also hire an accountant to keep your company’s payments, taxes, and other payroll concerns on track.
Whether you ultimately choose an alternative option or administer payroll yourself, it is vital to understand all work that goes into paying your employees beyond just sending a check. Whether you choose to go it yourself or bring an outside expert into the fold, proper payroll keeps your business running smoothly – for both your employees and your business.