Payroll Guide for New Small Businesses

woman runs payroll for her small business on a computer

As a new small business owner, you may have heard the phrase “running payroll,” which means paying your employees. It’s a rite of passage for new small businesses because it means you’ve grown to the point that you have other people working for you. But it can be challenging.

Running payroll correctly and accurately ensures that you’re complying with federal and state laws. It will also give team members confidence that you can and will pay them on time. Keep reading to learn how to run payroll in eight steps.

1. Apply for employer tax numbers

The federal government and your state track your company’s payroll for employment tax purposes. To ensure that they can monitor your business correctly, you’ll need to apply for an Employer Identification Number (EIN) with the IRS.

You’ll also need to register with your state, including their Department of Labor (DOL) and Department of Revenue (DOR). Learn more about registering with state agencies.

2. Review your team members’ classifications

There are two types of workers:

  1. Contractors – These workers tend to have more flexibility over their work, including deciding how and when the work will be done. Additionally, you typically won’t withhold taxes from their checks.
  2. Employees – You’ll have more control over how and when they work, including setting their schedules and managing most aspects of their job. You’ll also withhold taxes from their paychecks and pay employer taxes, like unemployment insurance (UI).

Read also: How to Know if Your Employee is an Independent Contractor

You’ll also need to determine whether your employees will work part-time or full-time because it may dictate whether you need to offer family and medical leave, health insurance, or other benefits.

Knowing whether your team members are employees or contractors and part-time or full-time will help you understand your responsibilities and comply with federal and state laws.

3. Set your employees’ pay rates

When someone joins your company, they agree to a specific hourly rate or salary. You’ll need to know that amount before you offer them the job. And it must meet federal and state minimum wage requirements and be competitive based on the position and location.

Read also: How Much Should I Pay My Employees?

4. Decide your pay schedule

If you’re paying employees, you’ll need to pay them on a consistent pay schedule. So, you’ll need to determine:

  • Pay frequency, which is how often you pay your team. The two most common frequencies are bi-weekly and weekly, but you may also consider paying your employees semi-monthly or monthly.
  • Paydays, which is the day your staff receives their paychecks.
  • Pay periods, which are recurring lengths of time where you track your staff’s hours worked and pay them for that time.

5. Choose payroll software

You can run payroll by hand, but there are several calculations involved, including federal andstate income tax withholdings. You may realize quickly that managing payroll manually can be overwhelming. Consider taking advantage of payroll software, like Workful.

Workful minimizes the time you’ll spend running payroll by syncing time clocks with your payroll, calculating deductions and taxes, and determining your company’s tax liability.

6. Determine how you’ll pay your team

There are two primary methods for paying your team: paper checks or direct deposit, where your team’s checks are sent to each person’s bank account. If you choose direct deposit, check with your payroll software to learn the process and when to run payroll to ensure your workers are paid on time.

7. Run payroll

Once you have everything set up, it’s finally time to run payroll. You’ll need to calculate:

  1. Gross earnings – If your employees are hourly, you’ll need to multiply their hours worked by their hourly rate. If they worked overtime hours, also include that amount, plus any bonuses, commissions, or other earnings that may be in your team members’ paychecks.
  2. Taxes – Each new employee will need to fill out a federal W-4 and state withholding form, so you know how much to withhold in income taxes. You’ll also need to withhold Social Security and Medicare taxes and match those payments for the employer’s portion.
  3. Net pay – Subtract taxes and deductions (for example, health insurance premiums or retirement contributions) from the employee’s gross pay. This is the actual amount the employee will receive on their paycheck or in their bank account.

Read also: How to Calculate Payroll Taxes

8. Deposit payroll taxes and file tax forms

After your team has been paid, you’ll need to file payroll tax forms, including Forms 941, 940, W-2, and 1099-MISC, and state forms.

Additionally, you’ll have to send tax withholdings and employer taxes to the IRS and state agencies based on your deposit schedules. Standard deposit schedules, for federal taxes, are quarterly, monthly, and semi-weekly.

If you hire more employees or give anyone a raise, your tax liability will likely increase. As it rises, your deposit schedules may change, so stay vigilant to avoid fines for not depositing often enough.

You’ll also have to pay UI taxes, which are not typically withheld from your employees’ checks and help provide compensation to people who have lost their jobs. UI tax is generally deposited quarterly.

Read also: A Small Business’s Guide to Employment Taxes

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