Payroll is a critical component of any small business. However, handling it correctly can be complicated and time-consuming. Knowing your obligations and staying updated on changing rules and regulations is important.
Whether you manage payroll in-house or with professional assistance, here are some important tips to help you navigate the payroll process:
Understand Your Tax Obligations
Managing payroll requires the right balance of attention to detail and organizational skills. In addition, compliance with federal and state rules and regulations is vital, as mistakes can have severe financial consequences. So, how to set up payroll?
When establishing a payroll system, it is crucial to distinguish between 1099 and W2 employees, ensuring accurate tax withholding for traditional staff members (W2) and recognizing the independent contractor status (1099) that requires self-managed tax responsibilities. Accurately calculating and reporting taxes is one of the most important aspects of payroll management.
This includes income tax, Social Security and Medicare contributions, state unemployment insurance fees, and workplace pensions. It is also important to note that taxes are constantly changing, and the specifics of each tax vary by location.
Another payroll requirement is filing business property taxes. This involves submitting tax forms for your business’s physical space and other assets, such as automobiles and equipment. Some business owners may qualify for a home office deduction, which can reduce this expense.
Finally, you should make quarterly estimated tax payments. These are required for companies that expect to owe at least $1,000 in federal taxes. The IRS accepts payments online through the Electronic Federal Tax Payment System or by mail using form 1040-ES. These should be submitted by the due date to avoid penalties and interest charges.
Determine Your Payroll Needs
The first step in processing payroll is understanding your business’s specific needs. This includes determining whether you’ll pay hourly or salaried workers, the hours worked per pay period, and any other unique compensation amounts that may apply to your employees.
It would help if you also decided how often you’ll process payroll, such as weekly, biweekly, or monthly. This will depend on your local laws, the type of work you do, and your cash flow.
Once you’ve determined your specific payroll needs, it’s time to set up your system. This will involve collecting employee information, setting up a schedule, and issuing payments through employees’ preferred delivery methods (i.e., paper check or direct deposit).
You must also ensure your payroll system complies with current tax regulations. This includes verifying that federal, state, and local tax withholdings are correct and ensuring you have documentation for W-2 filings and 1099 reporting. This task is especially important for complying with state and local wage and hour laws.
Select a Payroll Platform
Choosing the right payroll service provider is one of the most important business decisions a founder or small business owner makes. Depending on your needs, select a provider that offers multiple payment options (direct deposit, paper checks or prepaid debit cards), garnishment payments, workers’ compensation insurance, PTO management and detailed payroll reports.
Consider the price and whether a contract is required. Many payroll services operate month-to-month with no warranties, while others require yearly commitments. Look for provider reviews and ask for recommendations from fellow business owners.
When comparing prices, remember that payroll processing is a business expense and the more complex your needs are, the more costly your software will be. Lastly, it is important to determine how easy the software is to use. Ideally, it should have a clean, clutter-free user interface with contextual feature hints and an intuitive experience.
This will save both you and your employees time as well as money. It’s also worth checking for support features like training articles, how-to videos and community forums.
Set Up Your Payroll Process
Before you begin calculating payroll, getting your ducks in a row is important. This includes having a process to ensure employee identification numbers and forms are accurate and verify that wages and deductions match up.
Taking preventative steps in this area can save your business thousands in lost fines and penalties. Also, you’ll need to determine if your business needs a time clock or other technology to track work hours. If so, you’ll need to train employees to use it properly. Next, you’ll need to establish how often you’ll process payroll – weekly, biweekly, semimonthly, monthly, or quarterly.
Once you’ve set a schedule, you must calculate each employee’s gross pay or total earnings before deductions. This includes checking things like PTO and additional income such as commissions or bonuses. You’ll then subtract each employee’s deductions to determine net pay or take-home pay.
Then, you’ll distribute payment and report new hires to the IRS. Managing these tasks is easier with a simple, centralized employee records system. This lets you quickly gather information, documents and reports – even from mobile devices.
Prepare for Payment
Whether you’re hiring full-time employees or contractors, it’s essential always to double-check your data. This will help prevent costly mistakes that can lead to tax and labor compliance penalties, not to mention employee dissatisfaction.
Aside from verifying your employees’ information, you must also determine what type of payroll schedule makes sense for your business. Some common options include biweekly, semimonthly, and monthly. Once you choose a pay schedule, let your team know when they can expect to receive their paychecks and what deductions they’ll be expected to make.
You should easily set up a payroll process that meets the needs of your growing business. A great way to start is by choosing a payroll provider that’s easy to use and built to grow with your company.
Look for a user experience that features an intuitive menu structure, easy-to-read text, and appealing colors. Remember to ask your potential provider what kind of customer support they offer, including phone, email, and live chat. The more help you get, the less stress and time you’ll spend on your payroll process.
