How to Do Payroll for a Small Business
Payroll doesn't have to be a difficult task for your business. A properly managed payroll system can assist your small business in paying employees accurately and on time while preventing the possibility of expensive IRS and state penalties.
Choose which aspects of the payroll process you want to handle internally and which you want to outsource in order to create a solid system. Then, keep track of employee hours and keep records up to date so that when it's time to do payroll, it may be a quick and accurate process. Correct payroll calculation can be difficult, especially if you own a small firm. Your area of expertise is business ownership, not necessarily managing the myriad tax and labor rules that are relevant to each of your employees. How to manually file payroll taxes
Payroll taxes are the federal, state, and local taxes that a company deducts from an employee's paycheck. They consist of Medicare, Social Security, and Income Tax. You must be aware of the current tax rates in order to calculate your payroll tax correctly. For instance, the 2020 Social Security tax is 6.2%, and the 2020 Medicare tax is 1.45%. The percentages are calculated annually. Apply for an Employer Identification Number (EIN)
Your company's (employer identification number, or EIN) is a special number given to it by the Internal Revenue Service (IRS) for tax-related purposes. When providing data on your employees to federal and state government entities, this number identifies your company. Examples of this data include their overall income and the taxes they have paid.
Apply for an EIN straight from the IRS. An online application is the most practical approach to conduct this transaction. However, fax and postal applications are also accepted. For any additional EIN requirements, check state and local regulations.
Even though a lot of states and municipalities recognize your federal EIN as proof of identity, some do need separate numbers for taxes. New York, Massachusetts, and South Carolina are a few examples. By visiting the small business website for the relevant state, you can learn about your city's and/or state's requirements. Once you have your EIN, you must ask your employees for the necessary tax information. To do this, all staff members must complete forms I-9 and W-4. You must gather 1099s from any contract or independent contractors. Employees fill out legal information about their employment status, choose whether to make certain deductions, and fill out other pertinent information on these payroll forms.
Payroll processing is impossible without the information on these forms. Depending on the data your employees supply, there are laws dictating when you must send this paperwork to the IRS.
Know the distinctions between independent contractors and employees
It is crucial to grasp the difference between the two as whether you hire independent contractors or employees has a substantial impact on how income, Medicare, Social Security, and unemployment taxes are paid.
The fundamental test consists of the following three key inquiries:
Does the employer have any control over how, where, or when the task is done? If so, it is likely that the worker is an employee.
Does the employer have any financial control over the job? Are expenses repaid, for instance? If so, it is likely that the worker is an employee.
Is there an ongoing partnership or is the employee only hired for a specific assignment with no future plans? If there is an ongoing connection and benefits are provided, the worker is probably an employee
Select a pay schedule.
You must choose how to pay your employees after determining all the pertinent tax information for your company and its staff. Weekly, bimonthly, semiweekly, and monthly pay schedules are among the four available options. Each of the four schedules has its benefits. Think carefully about how frequently you'll pay employees, but don't take too long that they go without pay for disproportionately long periods of time. Spend 15 to 30 minutes researching state laws pertaining to your payroll schedule.
Store your documents
Businesses must maintain employment tax records for at least four years, as required by the Internal Revenue Service, and payroll tax records for at least three years, as mandated by the U.S. Department of Labor. Additional record-keeping obligations may be imposed by the states.
Although there are no specific federal regulations for how to retain these records, the IRS advises that you keep the information well-organized, such as by fiscal year, and secure from hazards like floods. Regarding the location and methods of record keeping, several states have additional regulations. You can typically store paper records at home or at a storage facility. Back up the files for any electronic records provided by payroll software on a different platform or device.