If you’re tasked with setting up payroll for a new company, there
are many different things to consider. Before going on a hiring spree, a few
things will need to be in place first; not just for taxes or legal compliance
but also to ensure the confidence of job candidates that they will receive
In this article, we’ll
walk you through some payroll basics you should know when laying the payroll
foundation for your new business:
Determine a Payroll Schedule
The first thing to decide is your payroll schedule and how often you want to run payroll. This includes when paychecks are issued to employees as well as what constitutes a pay period. Paychecks are sent out weekly, bi-weekly or twice a month but there should be some buffer time of a few days between the end of a pay period and when paychecks are actually processed.
Each new employee should have a W-4 on file,
the form that determines what federal taxes and other withholdings are taken
out of each paycheck. The completion of this form should happen during onboarding
and can be updated whenever an employee has a significant life change, such as
marriage or divorce, that affects their withholdings.
law states that the first $132,900 of an
employee’s income is subject to a 6.2% of their income to a social security
tax. The employer then pays another 6.2%. Anything earned over the maximum
amount are exempt from additional social security taxes.
If you earned $150,000, you would still have
to pay the social security tax on the first $132,900 but the remaining $17,100
would not be taxed at all for social security.
Similarly, the first $200,000 of a taxpayer’s
income is subject to withholdings of 1.45% for Medicare taxes. Unlike with
social security, however, earnings above $200,000 are still taxed, at a rate of
1.54%. In either case, the company is responsible for paying 1.45% of all employee
wages to Medicare.
So if you earned $210,000, the first $200,000
would be taxed 1.45% and the last $10,000 would be taxed at 1.54%.
Both Social Security and Medicare taxes are to
be paid through the Electronic
Federal Tax Payment System (EFTPS) in accordance with
your deposit schedule. The IRS will inform you of your schedule based on your
tax liability for the most recent lookback period, although quarterly, monthly
and semi-weekly schedules are most common.
Federal Unemployment Tax
The Federal Unemployment Tax (FUTA) requires that employers pay 6% of all employee income each year – for the first $7,000 – to support unemployment compensation to those that have lost their job. This means that if you pay an employee $10,000 in January, 6% of the first $7,000 (or $420) is due but no more must be paid for the remainder of that year for that employee.
Be aware, though, that the law doesn’t require
you to pay this tax until the value is at or above $500
DL1-65 identifies each employee’s emergency
SF-256 identifies employees who
self-identify as disabled and helps the government improve how they support
employees with disabilities in the workplace.
Now that you have a better understanding of what
components go into first establishing your payroll schedule, how to capture and
track withholdings, and important documents to keep on file with an employee,
consider using an HR assistance
tool like Workful to make the process of gathering and
storing this information that much easier.