Payroll Basics for Small Businesses
While processing payroll for your business can be daunting, it’s not impossible. It is, however, time-consuming and meticulous, and errors could land you in trouble. Before you get started and if you ever have any questions, it’s best to consult with a professional rather than Google. But to give you an idea of the basics, we have a simple eight step guide to get you started. This is a great way to get a feel for the process so you can decide if it’s something you want to take on yourself or not.
How to Set Up Payroll: An 8 Step Guide
Here’s an easy to follow 8-step guide for setting up your own manual payroll system.
1. Get an EIN
The first thing you will need is an Employer Identification Number from the IRS. This is used to identify your business for tax purposes. If you are a new business, you must apply for an EIN. You’ll also need to check with your state and local tax office to see if you need an EIN from them as well.
2. Collect Employee Tax Information
You will need to have all employees fill out a W-4 and a I-9. Contract employees or freelance workers should fill out a 1099. These forms will provide you with tax withholdings amounts for each employee.
3. Choose a Payroll Schedule
Decide how often to pay your employees. The four pay schedules are weekly, biweekly, semiweekly and monthly. There are advantages and disadvantages to each, so choose carefully, but also be aware that some states require hourly workers to be paid weekly.
4. Calculate Gross Pay
Gross pay is the total earnings each employee earns based on their hourly rate and hours worked. To calculate, multiple the number of hours an employee worked in a given pay period by their hourly rate.
5. Process Payroll Deductions and Withhold Taxes
Once you have gross pay, use each employee’s W-4 to determine their deductions, allowances and other withholdings. You will need to subtract things like:
- Pretax deductions, including health insurance, union dues and 401(k) contributions
- Federal, state and local taxes
- Social security
- Medicare
- Post-tax deductions, such as court-ordered wage garnishments and Roth IRA contributions
6. Determine Net Pay & Pay Your Employees
Net pay is gross pay minus an employee’s taxes and deductions. This is the actual amount owed to the employee for the given pay period. Disperse these wages via live checks or deposit electronic payments to each employee by payday. Be sure to create a pay stub to track what you are withholding for each employee.
7. File Payroll Taxes
Submit the required federal and state payroll taxes to the government on time. This includes income taxes, Social Security and Medicare taxes. You may also be required to pay federal unemployment tax (FUTA), state unemployment tax (SUTA), state unemployment insurance (SUI) and Federal Insurance Contributions Act (FICA) taxes.
8. Store Payroll Records
Keep detailed and organized records of all pertinent payroll data. You are required to securely store your payroll and tax records for specific lengths of time in accordance with the federal Fair Labor Standards Act (FLSA) and state laws, generally at least 4 years.
Managed Payroll Services
Remember, these are just the basics. If you need help or have any questions, be sure to check with an experienced accountant. We are an experienced New Mexico accounting and tax firm specializing in small and growing businesses. Our managed payroll services ensure accurate and compliant compensation and offer the tools and support you need to grow your workforce, reduce non-compliance risks, and manage labor costs. Let us increase your efficiency and reduce your payroll stress. Contact us today for a free consultation.
