How to Make Payroll as a Small Business Owner
December 9, 2021 | Last Updated on: July 26, 2022
December 9, 2021 | Last Updated on: July 26, 2022
There’s nothing more exciting for a small business owner than when your company is finally up and running. But many company heads dread some of the more mundane tasks that come with owning a business, like having to manage the finances when payday rolls around. Nonetheless, it’s vital that your employees are paid on time and that you’re compliant with employment laws. An efficient payroll system will help your business operate more smoothly and meet obligations both to your workers and the government.
Here’s the good news: It doesn’t matter where you are in your business journey. Streamlined payroll solutions are well within your reach. In this article we’ll look at the benefits of having a payroll system, walk you through the steps to setting one up, and answer some commonly asked questions.
Payroll involves multiple steps that run from laying the groundwork to paying your workers and paying payroll taxes. If that sounds complicated, don’t worry–just follow these steps:
An EIN is a number the IRS assigns to your business for identification purposes. The IRS will require an EIN number to deduct your employees’ withholding taxes or fill out tax forms. You can get your EIN by applying for one through the IRS.
While some businesses do their own payroll, doing so compounds the stress for small business owners. Other options are hiring a bookkeeper or CPA or outsourcing the payroll process to a payroll provider. Some businesses also use payroll software to streamline their payroll process.
Small businesses who make payroll in-house are more likely to make mistakes, particularly where payroll taxes are concerned. Employers face stiff penalties for these types of errors. For example, in 2020, small businesses were penalized nearly $6 billion by the IRS for tax miscalculations.
Entrepreneur reports that almost half of all business owners say that bookkeeping is their least favorite part of running a business. Forbes points out that many business leaders feel overwhelmed and that delegating tasks to create more time helps them feel less overwhelmed.
When you have a team of workers on your payroll, utilizing a payroll provider’s services or payroll software is a win, no matter how you slice it.
Small business payroll software companies like Paychex and NCR help conserve time by speeding up and automating the payroll process. That allows you to focus on running your business without the added worry of manually maintaining records, making calculations, and meeting government compliance requirements. When a streamlined payroll solution is used, your business is less likely to make payroll mistakes or incur tax penalties.
The government requires employers to maintain payroll records and is constantly changing their requirements. Payroll providers stay up-to-date to meet those requirements as new tax laws and tax tables come into effect. Therefore, they offer a high degree of accuracy in calculating payroll for your small business.
Payroll service providers can also handle more complicated payroll issues, such as wage garnishments.
Small business owners should have new hires fill out a W-4 Form so withholding taxes can be calculated. Doing so will provide the necessary information, such as the worker’s social security number, filing status, and number of dependents claimed.
Employees wanting direct deposit should fill out a form with their bank information. The form will also authorize you to make payments to them electronically.
Figure out how often you want to pay your employees. This will help establish your pay period or pay schedule. Some employers have a weekly payroll, while others pay employee wages biweekly. Still, other small business owners elect to pay their employees semi-monthly on specific days, such as the 1st and the 15th. Before settling on a pay period, contact your state’s labor or workforce office to ensure that your chosen pay schedule is compliant with your state’s labor laws.
Though you likely already have a bank account for your business, a dedicated payroll bank account is advisable. It will make it easier to maintain accurate payroll records and help to avoid unwanted overdrafts. Once you determine how many workers are on your payroll and the salaries and expenses associated with each employee, you’ll be able to ensure that you have the adequate cash flow available in the payroll account to meet those needs.
Having one checking account for all of your business’s operating expenses increases the chance that a processing error, fraud, or accidental overdraft could jeopardize your employees’ paychecks. That’s the last thing your business needs because your workers are your company’s most important assets.
If you’re performing manual payroll, you’ll need to calculate how much taxes to deduct from each employee’s paycheck. This includes state and federal taxes, as well as FICA taxes. You’ll have to determine both the employee’s portion and the employer’s portion owed to the IRS. Of course, if you use accounting software or a payroll service provider, you’ll just have to submit the required information, and it’ll figure it all out for you.
Once the withholding amounts are determined, you’ll need to pay any local tax, state tax, and federal tax that is due. Small businesses are also required to submit an employer federal tax return regularly, typically quarterly, in addition to their annual taxes.
If you hire an independent contractor, you’ll need to provide them with a W-9 form so they can fill it out and return it back to you. Even though you don’t withhold taxes on independent contractors, you’ll need the information to fill out a 1099 Form at the end of the year for any contractor you hire that made $600 or more through your business.
The Internal Revenue Service has strict rules regarding the designation of workers. Whether a worker is classified as an employee or an independent contractor impacts taxes, Social Security, Medicare, and more. The distinction is made by looking at these factors:
Upwards of 30% of small businesses misclassify workers, either through an honest mistake or to avoid paying more taxes. This can cause serious trouble in the form of fines, back taxes, and other penalties. When in doubt, a professional familiar with payroll laws can help make the correct determination.
It depends on how your business is structured. If you own a C-corp or S-corp, you can have a recurring, set salary on the payroll. However, the IRS prohibits partnerships from drawing a regular payroll salary. It’s best to get advice from a professional to determine whether or not you can put yourself on your company’s payroll.
The primary benefit of a small business owner getting on the payroll is that your personal and business finances will have more stability. Paying yourself also rewards you for all of your hard work in getting your business up and running. It’s relatively easy to budget your salary into your payroll expenses, and your taxes are taken out upfront, which can help avoid an unpleasant surprise at the end of the year.
Payroll is the accounting process of compiling a list of employees, calculating their earnings and taxes, and delivering their salary, either through direct deposit or a paycheck. Pay stubs show the net pay remitted to an employee and any deductions or taxes that have been withheld from the worker’s gross salary.
Tax liability is one of the most considerable burdens of operating a small business. The types of small business taxes you’ll have to pay depend on the kind of business you run.
There may be other taxes you’re liable for, including self-employment taxes, FUTA taxes, property taxes, capital gains taxes, dividend taxes, and excise taxes. Once again, a payroll expert or small business provider can help you determine your tax liabilities.
The forms your small business will need to file with the IRS will depend on your particular business. They include:
Other tax forms may be required, depending on how your business is structured. Consult a professional to determine if your company should file additional tax forms.
A simplified and efficient payroll system is essential for every small business owner. Although it may feel overwhelming at first if you’ve never had to process payroll before, there are plenty of great solutions that can work for you and your business. Many small business owners find that a payroll service provider or software makes the task less daunting. Consider consulting with a small business provider that partners with a payroll expert to determine which solution is best for your business.
November 24, 2022
November 23, 2022
November 22, 2022