Payroll Checklist for Small Businesses
Own a small business with employees? Learning to run payroll is essential. Paying your employees the correct amount, and on time, is crucial to the well-being of your business. But the various pay rates, deductions, and taxes can make the task seem complicated and overwhelming.
In this article, we'll walk you through the key steps to completing your first successful payroll run.
1. Get an Official Employer Identification Number
As a small business owner with employees, you're obligated to register your business in order to run payroll. In all cases, you'll need an Employer Identification Number (EIN) that's registered with the IRS. This number allows you to make federal payroll tax payments. In some cases, you'll need to get corresponding documentation at the state or local level, so consult with your state and local laws. While you're at it, acquaint yourself with applicable wage laws that will determine the minimum wage and other employer rules where you do business.
2. Open the Necessary Withholding Accounts
One of the responsibilities of having employees is to collect taxes on their behalf, but the money you withhold can't just go into your personal or business account. You need separate withholding accounts.
Open an Electronic Federal Tax Payment System (EFTPS) account for federal tax payments, a state unemployment insurance account for state tax payments, a new-hire reporting account, and a workers' compensation account, if applicable.
3. Handle Your Employees' Information
How you gather, store, and retrieve your employees' information will determine whether payroll is a struggle or a breeze. It's far simpler to build a good system from scratch than trying to fix a broken one. Here's how to get organized.
- Standardize your onboarding processes to make sure you collect all the right documentation from your employees as they're hired. You'll need their name, address, phone number, social security number, and hire date. If you have existing employees, ensure you have all this information in their files.
- Make sure each hire fills out a W-4 form from the IRS and an I-9 form, which establishes employment eligibility, from the United States Citizenship and Immigration Services.
- Have your contractors file a W-9 form.
Once you collect the appropriate information, you need to store the data that allows you to retrieve, edit, and save it as needed. Don't underestimate the importance of data security. Whatever system you use must be able to protect your employees' valuable personal and financial information.
4. Establish How Your Payroll Works
Decide whether your employees will be paid weekly, biweekly, or monthly, and whether you'll use direct deposit, checks, or both. If you offer direct deposit, you'll need to sign up with a payroll service, register, and enter your employees' banking information. If you want to use physical checks, you will either have to write them by hand, use a service to print them, or enlist a third party. Whatever you decide, inform your employees so they know when and how they'll be paid.
5. Calculate Payroll
You're finally ready to run payroll! If it seems like it took a lot of steps to get here, remember you'll only have to do the first four steps once.
Calculating employee payroll is quite simple. To establish an employee's gross pay, multiply the hours they worked by their hourly wage. From that number, subtract any mandatory and voluntary deductions. The amount your employee is paid — the net income — is the gross income minus deductions.
Mandatory deductions are withholdings you are required by law to subtract from your employees' checks. These might include:
- Federal income tax
- State income tax
- FICA tax, which goes to Social Security, Medicare, and Medicare surtax, if applicable
Voluntary deductions are based on benefits an employee may have with your company. For example:
- Health insurance
- Life insurance
- A 401(k) or other retirement plans
- Stock plans
- Tuition or professional certification
6. Pay Your Employees
The easiest way to pay your employees is by using direct deposit through a payroll service or software. If you use checks, you'll have to factor in a bit of extra time to make sure they're ready for payday. Whatever method you choose, have a consistent payment schedule.
7. Pay Your Taxes
Payroll doesn't end when your employees get paid. Employers are responsible for collecting and remitting taxes — and other withholdings like insurance or a 401(k).
Every time you run payroll, your employees' withholdings should go into the appropriate withholding accounts. From there, you'll need to pay taxes and employee benefits, which are often monthly. Payroll taxes are due quarterly, so unless you're using software, you'll need to set reminders.
Congratulations! You've registered your business, set up an organized and effective records system, and learned how to run your first payroll. There's one less obstacle in your path to running a successful business.
If you want to make things even simpler, consider Roll by ADP, a payroll app so easy and intuitive that you won't need any training to use it. However, if you have any questions, answers are easy to find— Roll by ADP comes with 24-hour chat support. Sign up with Roll today to get started, and Axos small business banking customers get their first four months of payroll for free.
Payroll Checklist for Small Businesses
This blog post was published by Axos Bank on July 06, 2022 and last updated on July 06, 2022.