Hiring employees is exciting. It means you’ve learned how to successfully start a small business, and now your company is growing. Hiring employees also means you have new employer responsibilities. Not only do you have to manage workers, but you also have to start running payroll.
Kaylee Riley from Patriot Software, LLC. wrote this helpful post on how to do small business payroll. Read on!
Setting Up Payroll
Before you can run payroll, you have to collect information and make decisions about your payroll setup.
You need information and accounts for your business to run payroll. Business items you need include:
- Employer Identification Number (EIN)
- State tax accounts and numbers
- State business registration number
- Electronic Federal Tax Payment System (EFTPS) account for paying federal taxes
- Tax rates
You also need information about each employee, which will typically be gathered from new employee forms:
- Full name
- Social Security number
- Withholding allowances
- Benefit deduction amounts
- Other deduction amounts
You must also make some decisions about your payroll:
- How much will you pay each employee?
- Will you give a salary or hourly wages?
- Are the employees exempt or nonexempt from overtime wages?
- When does the workweek start and end?
- How often will you pay employees?
After you get all the necessary information and make your decisions, it’s time to set up your payroll. You must have all this information before you can run payroll for your small business.
There are three main ways you can run payroll: do it yourself by hand, hire a payroll professional, or use payroll software.
Doing payroll by hand costs the least up front. However, you must know how to run payroll. Also, doing payroll by hand puts you at greater risk for mistakes that lead to penalties.
Payroll professionals have a lot of knowledge and experience with running payroll. But, using a professional is likely the most expensive option.
Online payroll software might be a good fit if your small business is looking for ways to reduce costs while still having accurate payroll.
By storing your information in the cloud, at anytime you can easily access payroll history. It also gives you the peace of mind that your payroll information is stored in compliance with federal and state record keeping requirements.
Wendy Bolois, Payroll Product Director at Patriot Software
Once you decide how you will run payroll, use the information you collected to set it up. Luckily, you only have to set up your chosen payroll method once. Once you’re set up, you can run payroll in three steps.
First, calculate payroll. Enter information about employee wages and time worked. For example, you have to enter how many hours each hourly employee worked per workweek. Calculate the total wages each employee earned for the pay period, also known as gross wages. Then, calculate each employee’s net wages, or take home pay, by subtracting taxes and deductions.
Next, check your work. Make sure you didn’t use incorrect numbers, like 400 hours instead of 40 hours. Payroll mistakes can lead to costly fines, penalties, and even jail time.
Last, finish running payroll and pay your employees.
You can choose from several payment methods for employees.
Check: You can print checks and distribute them to your employees. Or, you can handwrite them, which works best for businesses with few employees. Checks are good for employees who like traditional payments, but checks are easily lost and damaged.
Direct deposit: Direct deposit transfers payroll funds from your business bank account into employee bank accounts. With direct deposit, employees immediately get funds, but it doesn’t work for those who do not have bank accounts.
Payroll card: Pay cards are similar to debit cards. Each employee has their own card that they keep and reuse. Each pay period, you load employee wages onto the cards. Employees automatically get their wages, like with direct deposit. However, there are often various fees to use the cards or to get physical cash off the cards. You might consider a prepaid expense card, such as those offered by Bento, to give employees money for expenses.
Cash: You can pay employees in cash, but be careful. Giving employees cash is often equated with paying employees under the table. You must still subtract taxes and other deductions, and keep detailed records of your payroll.
Part of your payroll responsibilities includes collecting, remitting and filing payroll taxes.
The main payroll taxes you need to handle are:
- Social Security and Medicare taxes (sometimes called FICA taxes)
- Federal income tax
- Federal and state unemployment taxes
Some states and localities also have income taxes.
Each tax has a unique rate. You must withhold some taxes from employee wages, while others you must contribute to as the employer. You must remit and file forms for each tax by specific deadlines.
You can collect, remit and file payroll taxes yourself. You can also have your payroll software provider or payroll professional handle the taxes for you.
Small Business Payroll Tips
Make sure you consistently run payroll. Follow your pay frequency and pay your employees on time. If you need to, create a reminder to run payroll on time.
Employee self-service software can help you run payroll, especially if you manage a mobile workforce. Employees can fill out time cards, and you can share documents such as pay stubs with them.
You might have to periodically update your payroll process. If you choose to give employees a raise, make sure you implement the new wages in the correct pay period.
About the Contributors:
Author: Kaylee Riley is a writer for Patriot Software, LLC and Top Echelon, LLC. Kaylee writes about payroll, accounting, recruiting systems, and other small business topics.
Contributor: Wendy Bolois is the Payroll Product Director for Patriot Software, LLC.
Patriot Software is a provider of no-nonsense accounting and payroll software. Patriot’s mission is to make accounting and payroll fast, simple, and affordable for American small businesses.