According to an article by Michael Flint entitled “Cash Flow: The Reason 82% of Business…
Managing all of the tasks associated with payroll, including keeping abreast of the ever-changing legal and regulatory landscape, can be both a challenging and time-consuming affair. Setting up a proper payroll system not only streamlines your ability to stay on top of statutory responsibilities, but also allows you to avoid costly penalties from the IRS. Here are four simple steps to follow when first setting up your payroll system.
Register Your Business Accounts
Before you can hire employees and run payroll, you will need to obtain an Employer Identification Number (EIN) from the IRS. The EIN is often referred to as an Employer Tax ID or as Form SS-4. This EIN is necessary for reporting federal taxes and providing other necessary documents to the IRS. In addition to the EIN, you will also need to set up Electronic Federal Tax Payment System so that you can process your payments. Accounts for submitting state taxes as well as an account to report new hires will also need to be established.
Obtain Employee Information
Before you bring on new support, it is important to know the difference between an independent contractor and an employee. In legal terms, the line between the two can be ambiguous and it affects how you withhold income taxes, pay Social Security and Medicare taxes, and pay unemployment taxes. Once you hire your first employee, you will need to have them fill out a W-4 Form which is essentially a personal allowance sheet. This Form is necessary for an employer to determine how much federal taxes will be deducted each pay period from their check. If you are providing additional benefits, you will need to have them fill out forms determining whether or not it is a pre or post-tax deduction.
Set Wages and Frequency
As you set up payroll, you’ll need to determine whether you’re paying a salary or hourly wage, how you handle paid time off (not a legal requirement, but offered by most businesses), how you track employee hours, if and how you pay overtime, what your payroll period will be (weekly, bi-weekly, monthly), as well as other business variables. Other employee compensation and business deductibles such as health plan premiums and 401K contributions will also need to be deducted from employee paychecks and paid to the appropriate agencies.
Choosing a Payroll System
Payroll management and administration tends to require a meticulous attention to detail and accuracy, so it would behoove one to do some research to see what option fits best. One way to begin would be to consult with fellow business owners and discuss their experiences and see what recommendations they have. Typically, your options for processing payroll include in-house or outsourced third party options. Regardless of the option you choose to employ, you as the employer will ultimately be responsible for ensuring that your payroll taxes are reported and submitted on time.