Payroll may seem like a necessary evil, but it is an important task that allows you to keep your promise to employees that they will be fairly compensated. It also helps you avoid costly IRS penalties. While some small businesses can get away with doing payroll themselves, it’s best to find a full-service provider to handle it for you.
Determine Your Payroll Schedule
The payroll schedule you choose can seem like a small detail, but it greatly impacts your team’s ability to budget month-to-month confidently. This guide will walk you through the monthly, semi-monthly, biweekly, and weekly payroll schedules to help you determine which is best for your business. When deciding on a pay period, evaluating state laws, the types of employees you employ, and the rhythm of your cash flow is important. For example, if your company has a lot of hourly or variable-schedule workers, you’ll likely want to go with weekly or biweekly payroll cycles. On the other hand, salaried employees usually prefer to get paid once or twice per month. In some cases, it might be possible to transition from a weekly or biweekly payroll to a monthly one, but this will require careful evaluation. It’s crucial to consult with your leadership and finance teams and an experienced HR professional before making any changes.
Gather Employee Information
When calculating payroll, you must collect all the information necessary for your employees to get paid. It includes Social Security numbers, tax withholding information like allowances and dependents, federal and state tax rates, and other important employee data. You must also collect your business’s Employer Identification Number and find or register for your SUTA (state unemployment tax).
Before running payroll, ensure your business is in good standing with the IRS. If you still need to create your business, apply for an EIN online at the IRS website. The EIN is a unique number that identifies your business, similar to an individual SSN. When you’re ready to start processing payroll, it’s helpful to have the help of a full-service payroll provider. This way, you can trust that your taxes are correctly calculated, and your paychecks will be delivered on time. Plus, you’ll get access to tools that make tracking hours and other crucial employee information easier.
Set Up Direct Deposit
Payroll processes include processing employee payments, calculating tax withholding, filing taxes and completing other payroll-related tasks. For small businesses, these tasks can be extremely time-consuming and complicated. Business owners need to find ways to streamline the process and increase accuracy. One way to do this is through direct deposit but you must have the feature of transferring funds from a business account to a personal Account. Direct deposit sends funds electronically from an employer’s bank account to an employee’s. Employees must provide their bank information, which is stored securely by the company and verified using an ACH (automated clearing house) network. Then, the money transfers automatically into the employee’s account on payday.
Small companies can use their business banks or a payroll provider to set up direct deposits. If you use a payroll service, the provider can guide you through the small business payroll information and walk your team through how to manage it. You may also work with a bookkeeper or accountant who specializes in payroll and can help you implement the process for your business.
Calculate Pay
Payroll is the procedure used to compensate employees for work done. It encompasses a lot of different tasks, from calculating employee gross and net wages to making payments to tax agencies and vendors that provide benefits like health insurance or retirement plans. Calculating payroll is critical for small businesses. It includes figuring out how many hours each employee worked for the period (or minutes, if you’re using a time-tracking system). It would help if you also determined deductions—which vary depending on how an employee filled out their IRS W-4 form and your state’s tax laws. It includes federal income tax withholding, FICA (Medicare and Social Security), workers’ compensation, unemployment insurance, and possibly additional employer taxes like SUTA in some states.
Ideally, this information is recorded and compiled in a spreadsheet or payroll software. It’s then used to create each employee’s paycheck, which can be issued via direct deposit, a check, a mobile wallet, or a payment card. The last step is subtracting all deductions and taxes from the gross payroll amount to calculate each employee’s net pay. You must record these amounts, provide each employee with a pay stub, and file any applicable payroll taxes if your state requires it.
Process Pay
Payroll is necessary for your business, but it isn’t very easy and often requires expert assistance. While handling payroll manually is possible, many small businesses work with a professional payroll provider offering all-in-one payroll processing for a flat monthly fee. You might alternatively employ an accountant or bookkeeper to handle payroll duties, but this could be more expensive and involve more work.
When processing payroll, you must know your state’s employment laws and federal tax regulations. It includes getting an Employer Identification Number (EIN). This form acts like an employee’s Social Security number, knowing how much to deduct from employees’ paychecks for taxes, such as income tax, FICA, and Medicare. Managing payroll can be a big task for small business owners, and mistakes are costly. 40% of all small businesses pay IRS penalties for payroll tax errors yearly. Ensure you have the proper processes to avoid these costly errors and keep your employees happy and productive.