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Topics: Financial Institutions Small Business Advice
Summary: Below are tips to help a new or expanding business with their payroll efforts. Since payroll plays an important role in determining workers’ compensation insurance premiums, it’s vital for your customers to have their payroll set up correctly.
Bringing new employees aboard is exciting for any small business owner. As you grow your workforce, you’ll need to figure out employee taxes, benefits and small business payroll.
The thought of running payroll for the first time may be overwhelming, but don’t sweat it. Read on to learn some of the basics of how to set up payroll for your small business
Before hiring new employees or setting up payroll for small business, you must get an Employment Identification Number, or EIN. This is also called an Employer Tax ID. You will use this number to report taxes to the IRS and information about employees to other state agencies.
Some states and local governments may require your small business to obtain additional tax IDs. To ensure you’re tax compliant, check with your local government to see what’s required in your area.
When figuring out how to pay employees in a small business, it’s critical to correctly classify each person as an employee or independent contractor. There is a fine line between the definitions legally that make a huge difference when it comes to tax withholdings.
Generally, businesses are required to withhold federal, state and local income taxes from employee paychecks, plus Medicare and Social Security. On the other hand, small businesses do not withhold taxes from independent contractors. Instead, independent contractors pay self-employment, federal and state income taxes through a business tax return.
This may seem like a minor detail, but making a mistake could have major implications for your small business. For example, if you accidentally identified an employee as an independent contractor, you might get stuck paying back taxes to the IRS. Check with your business and legal advisors for assistance to help classify your workers correctly.
As an employer, you have tax obligations for every employee or contractor you bring on board. To run payroll correctly, keep the following information on deck for each team member:
In addition to this information, each employee should have form I-9 on file, which verifies their eligibility to work in the United States. Each employee should also complete a W-4 when they start work so the IRS knows how much to withhold from their pay. Independent contractors must fill out a W-9.
There’s no day like payday, but when and how often should that be? Most small businesses run payroll on a monthly or bi-monthly schedule, depending on their employees’ needs, cash flow and state requirements. Generally, the most important thing is to pick a schedule and stick to it so your employees can plan appropriately.
The average business owner spends between 1-5 hours on payroll each month. That’s why we recommend investing in fast, accurate payroll software to do those calculations you. Pick one that works best for your small business and get your payroll up and running.
We know this is a long process, but just remember— you only have to set up payroll once (though you may need to add or remove employees from payroll as your headcount changes). As long as you pay employees, file taxes and submit any necessary forms accurately and on time, you can have peace of mind and get back to running your business.
This material is for informational purposes only and is not legal or business advice. AmTrust Financial does not represent or warrant that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors.