Payroll is often the thorn in the side of small business owners. You either have to hire a bookkeeper and pay them to cut checks and keep track of when taxes are due, or you have to take time out of your already busy schedule to perform the task yourself.
Although payroll can be challenging, particularly if you take out federal and state taxes, it doesn’t have to be impossible. The United States Small Business Administration (SBA) offers classes and tax help via local offices around the country. You can learn what you need to know or seek help when needed.
According to the SBA, around 32.5 million small businesses exist in the United States. Many of those companies are too small to hire someone to handle their payroll. The owners must wear many hats, including figuring out how to keep track of employees.
Since paperwork is a vital part of conducting business, here’s what you need to know about doing payroll.
Before you can complete payroll, you need some information from your workers. Include filling out W-4 forms as part of your employee onboarding process. You need a valid mailing address, taxpayer identification, and how much the person wants withheld from their paychecks.
You should also consult with both the state and federal regulatory agencies about additional information. You may need to collect a form for homeland security or other types of documents before you can add someone to your payroll.
You don’t have to physically write out checks in 2022. In fact, many employees prefer direct deposit. It’s easier for you and you can automate payments so you don’t have to do as much work.
Combining time tracking technology with payroll software lets you pay your workers without having to do anything. You probably do want to conduct a quick audit before payments go out to ensure the hours are correct. Anyone can make a mistake and forget to turn off their task timer.
Small businesses that pay employees must withhold taxes from every paycheck. You also are responsible for paying in some social security wages. A smart move is to have a separate folder or account for taxes and pay them out of that account. Don’t use the money for anything else.
Most businesses pay in each quarter, so you don’t want to run into a situation where you forgot to withhold the funds and now have to scramble to come up with them. It is also highly frustrating for employees to suddenly have double money withheld to make up the difference or something along those lines.
If you plan to use automated tools, but don’t have time to keep up with checks and audits, you could always hire a third party to do the work for you. You shouldn’t have to pay them for more than a few hours to look over employee timesheets, make sure withholding is correct and make any adjustments.
They can also ensure payments went out when they’re supposed to. Payment systems sometimes run into glitches and employees can panic when their money doesn’t arrive on time and they have bills looming.
The Internal Revenue Service estimates around 28% of individual tax returns include business income or loss. Are you taking out enough deductions when it comes to payroll expenses? Make sure you keep track of anything you pay for accounting software, consultations and payment fees.
Even if you only spend a little on something, you should always deduct it from your profits so you can reduce your tax burden.
You’ll need a state and federal ID for when you do pay into your taxes. You can get these via the IRS and the internal revenue service in your state. Your state government website is the best place to start to figure out what forms you need to fill in to get the ID.
Another thing to consider is how often you initiate payroll. Once a month might save you some money in fees and preparation, but you might have a hard time retaining employees as most don’t like to be paid so infrequently.
Every other week is more standard in the industry, particularly for smaller businesses. Most staff can budget accordingly with a bi-weekly payroll schedule. According to the Bureau of Labor Statistics, getting paid every two weeks is the most common setup.
You could also pay weekly, which may cost a bit more in fees to initiate payments and for third-party contractors to monitor your payroll. However, you could also have an easier time hiring candidates to fill positions. You have to decide which schedule works best for your company and employees.
You have to decide if employees are contractors or not. With freelancers, you typically don’t take out taxes and you issue a 1099-MISC at the end of the year. You may pay them different amounts, hire them sporadically, let them work on their terms and time and a few other scenarios.
One problem that occurs is when businesses try to classify full-time employees as contracted ones to avoid the complications of payroll taxes. Check the regulations carefully to make sure you’re in compliance. You could incur fines and have to pay uncollected taxes if you don’t classify employees correctly.
Whenever you’re uncertain, it’s always best to consult with a tax professional. Paying out fines or fees may wind up costing you more than you’ll save going it alone when you don’t fully understand the ins and outs of payroll. While you can learn the basics and many aspects are easy to automate and do on your own, other things require the input of someone who fully understands tax code and can help you navigate the complexities.
Author Bio: Eleanor Hecks is the editor-in-chief at Designerly Magazine. She’s also a freelance web designer with a focus on user experience and lives in Philly with her husband and dog, Bear