How to Manage Payroll for Small Business
Expanding a new business comes with exciting milestones. From increased production to more income, seeing your efforts come into fruition is rewarding. But even though new hires are a great sign of growth, managing payroll for small business staff takes the fun out of it for many business owners. There are forms to fill, taxes to pay, regulations to comply with, and so many more human resources tasks.
But setting up a payroll system for small business hiring is not as daunting as it seems. How does payroll work for a small business? Here’s a guide.
Properly Set Up Payroll
The first step to managing a small business payroll is to ensure you are properly set up. Here are some of the most important factors to get started.
Before you do your small business payroll yourself, make sure you have your Employer Identification Number (EIN) ready. An EIN is a unique nine-digit number assigned by the IRS to identify a business entity and anyone else who pays employees. There are various ways to apply for an EIN, including online on the IRS portal. Check with your state’s employer resources to see whether you need a state EIN as well.
Have Employees Complete a W-4
A W-4 form enables you to withhold the correct federal income tax from your employee’s pay. Employees also need to complete a Form W-4 to document their filing status and keep track of personal allowances. For each new employee, you need to file a new hire report, so if you are hiring in 2020 you should note that there is a new version of the form as of January 1, 2020.
Determine Payroll Schedule
Now that your employees are all set to receive payment, you’ll need to decide how often you will pay them. It could be weekly or monthly, depending on you and the nature of your business. In addition to employee pay dates, you’ll also need to take into account tax due dates and filing deadlines.
Choose a Payroll System
When it comes to payroll systems, there are three options:
1. Payroll by Hand (Do-It-Yourself)
Also called manual payroll, it is the most cost-effective way to manage payroll in your company. It’s also the method that gives you the most control. However, if you’re like most business owners who don’t have extensive training, learning how to do payroll for a small business can be a steep curve and there is a large possibility of error.
2. Outsourcing Payroll
Payroll consultants or Professional Employer Organizations provide payroll help for small business owners, saving you valuable time as you don’t have to learn payroll. They handle payroll taxes, process paychecks, and keep records for your business.
This option is often the most expensive of all systems, however, and comes with a loss of control over payroll.
3. Online Payroll Software
This provides a middle ground between the other two systems. It takes some of the pain out of payday preparation, leaving you to handle payroll management and compliance concerns. It also reduces the risk of errors.
The only disadvantage with payroll software is that it does not take all the work off your hands.
When it’s time to pay taxes, the following need to be withheld, deposited and reported from the gross wages of each employee:
Federal Income Tax
The two most common ways of calculating income tax withholdings are through the percentage method and the wage bracket method, based on factors such as employee allowances.
This tax is withheld based on the employee’s Form W-4 information and depositing schedule must be as determined by the IRS. If your business reported $50,000 or less in the previous four quarters, you are required to deposit your taxes monthly, while those that reported more than $50,000 in taxes must deposit semi-weekly.
FICA (Federal Insurance Contributions Act) tax is made up of Social Security and Medicare taxes. In total, you need to withhold 7.65 percent of your employees’ wages per paycheck and it is paid by both employee and employer, meaning you must match the amount you withhold. FICA taxes follow the same depositing and reporting schedule as federal income taxes.
Unlike federal income and FICA taxes, state and local income taxes are applied to each state. They can differ greatly depending on your location; some states may not even have to withhold any state or local income taxes. Check with your state to determine your responsibilities, as well as your depositing and reporting schedules.
As an employer, you also need to pay taxes on employee wages: Federal Unemployment (FUTA) and State Unemployment (SUTA) taxes. FUTA tax rate is a percentage of employee wages up to the first $7,000 paid to each employee, while SUTA tax rates are determined by your state.
Keeping detailed records such as employee’s Form W-4, pre-tax and post-tax wages, and total hours worked each week is also required to manage payroll for small businesses. Payroll data should be stored for at least three years, while documents involving wage computations should be kept for at least two years in case the Department of Labor (DOL) needs to review them.
Learning payroll for small businesses can be tricky for any business owner. If you’re not confident about doing it yourself and would rather opt for a paid option, L3 Funding offers merchant funding so you can pay for top-of-the-line services. We understand the everyday needs of small businesses and our services are tailored to their unique needs. Apply online or call us today to learn more!