Small business owners are faced with a lot of responsibilities, especially in the early stages of their business. They must establish a regular source of revenue, streamline business operations, work with vendors and clients, and oversee the back-office functions of the company.
If the company has employees, they’ll need to ensure that they pay their staff correctly and in a timely manner.
While payroll may be relatively easy to calculate for companies that just have a handful of employees who work and reside in the same location, it can become more difficult to manage when workers live in other states or work remotely. In this article, we’ll discuss the best practices for handling payroll on your own.
An Employer Identification Number, or EIN, is the business equivalent of a Social Security number. It allows companies to identify your business for tax purposes. If you don’t already have an EIN, you can apply for one easily via the IRS website.
The EIN allows the IRS to track your payments to employees and identify your business separately from you when you file your income tax return.
Examine Your Employee’s W-4 Information
Form W-4 is used to determine your employee’s tax filing status and record any dependents. These details are used to calculate the appropriate withholding amount for federal and state tax purposes on each paycheck.
In some cases, employees may ask that you withhold additional payments for the IRS from their paychecks.
Pay Your Employees According to a Set Schedule
Businesses commonly designate set payment schedules for their employees. These may be bi-weekly, weekly, monthly, or twice per month. The schedule you use should be designed to fit the cash flow needs of your business and your employees.
Once you set up a payment schedule, stick to it. Employees depend on their paychecks to meet their regular bills and financial commitments, so making sure you don’t vary from the designated payment schedule can help build employee loyalty and fulfill your legal obligations.
Calculate Employee Gross Wages
Next, you’ll want to calculate the gross wages for each employee during the payment period. Employees who follow an hourly schedule will likely have time cards that you can use to determine their wages for the period. Salaried employees are a bit easier, as their gross income should remain virtually the same for each pay period.
Paychecks for employees who work on a commission basis or earn bonuses are trickier. Using payroll software is often the best choice in these cases, as there are separate tax calculations involved when paying a bonus. Companies usually pay bonuses separately from other paychecks.
If your employee has used any vacation or sick days, you’ll want to ensure that those are included in their gross wages.
Calculate the Deduction for Taxes and Other Withholdings
This is the most difficult part of calculating your payroll, especially if you are doing it on your own. For federal withholding guidelines, you can refer to the IRS website for proper withholding amounts.
Most employers offer benefits to their employees. These may include medical, dental, vision, or other types of paid benefits. If your employee is required to pay a partial cost for their benefits, you will need to deduct this on a pre-tax basis from their paycheck.
Other common deductions include retirement fund contributions, wage garnishments, or donations to charities.
Pay Taxes for Employees
The amount withheld from employees for tax purposes must be remitted to the state and federal governments. Typically, these must be paid quarterly, but in some states, monthly payments are required.
Review the IRS website and state government reporting requirements to determine the appropriate deadlines. If you miss making your tax payments on time, your company may be subjected to fines or penalties.
Most employers choose to handle their employee payroll needs through direct deposit. This method allows employers to automatically deposit each employee’s paycheck to their bank account.
This method is much easier for both employers and employees, as there’s no need for paper checks that require several days to clear and extra time to deposit in their accounts. If you do choose the paper route, you must distribute paychecks on the day that they are expected according to the payroll schedule.
Need Help with Payroll for Your Employees?
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