Need a step-by-step payroll guide to establish your small business’s payroll?
As a small business owner, if you just need a small payroll,
you can do it yourself with minimum time and effort…
even if you do not have any accounting experience.
be aware that there are many laws governing employee pay.
If you are unsure of these laws or do not want to stay up-to-date on them, you might want to consider hiring a payroll service, a CPA, or using payroll software such as Quickbooks Basic Payroll, Quickbooks Payroll, Quickbooks Desktop Payroll, Quickbooks Assisted Payroll, or Quickbooks Enhanced Payroll. There are many payroll options out there.
If you do decide to do it yourself, the key is setting up a simple payroll process that complies with all the applicable federal and state laws.
Also see: How to pay yourself as a business owner
Step-By-Step Payroll Setup:
If you do not already have an Employer Identification Number (EIN), you will need to apply for a number by filling out IRS Form SS-4. You can get the number immediately, either by phone or online. See How to Apply for an EIN.
Get state and local identification numbers if they are required in your area. Contact your state revenue department directly for information on applying to be a payroll provider in your state. (Oklahoma only requires your federal EIN.)
Determine who is an independent contractor and who is a full-time employee.
You don’t have to withhold taxes from an independent contractor’s pay; however, please don’t think that you can save yourself some trouble by classifying the total number of employees as independent contractors.
The IRS may penalize you heavily if you designate regular workers as independent contractors. For details, see the IRS Publication 15, also known as Circular E, The Employer’s Tax Guide.
Determine a pay period. Your small business is entitled to pay based on any schedule you want; however, most states require you to pay your employees on regular paydays.
Typically small businesses pay weekly, bi-weekly, semi-monthly, or monthly. A few states allow some employees to be paid once a month, but most require that you pay your employees at least twice a month. Check with your state department of labor for your state’s specific guidelines.
For employee tax information, have each employee fill out and sign IRS Form W-4
This form provides two critical pieces of information:
- the employee’s Social Security Number
- the allowances the employee is claiming for income tax withholding purposes.
Remember…if at any time…your employees marry or divorce, have children, gain or lose a dependent or want to change withholding amounts for any other reasons, they will need to complete and sign a new W-4.
Also, you are required by law to treat an employee as a single person with no exemptions for withholding purposes if you do not have an employee’s W-4 on file.
So make very sure you have a W-4 in your business files for each of your employees.
Notice: Any time your employees marry or divorce, have children, gain or lose a dependent or want to change withholding amounts for any other reasons, they will need to complete and sign a new W-4.
Another form you MUST have on file for every employee is a Form I-9
Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens. Both employees and employers (or authorized representatives of the employer) must complete the form.
Do not file Form I-9 with USCIS or U.S. Immigration and Customs Enforcement (ICE). Employers must have a completed Form I-9 on file for each person on their payroll who is required to complete the form. Form I-9 must be retained and stored by the employer either for three years after the date of hire or for one year after employment is terminated, whichever is later. The form must be available for inspection by authorized U.S. Government officials from the Department of Homeland Security, Department of Labor, or Department of Justice.
Always report new hires!
Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA)
ALL EMPLOYERS MUST REPORT ALL NEW HIRES…
to their state(s) within 20 days or sooner, depending on the state’s requirement. Check your state’s designated state agency and read more on this requirement in this article: The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
Establish payroll records. For federal tax purposes, you must keep the following information on file:
- the name, address, and Social Security Number of each employee
- the total amount and date of each payment
- gross pay and the portion of each payment that constituted taxable wages
- copies of each employee’s W-4
- copies of returns you filed
- copies of any undeliverable W-2 forms
Calculate withholding. For income tax purposes, the federal government provides tax tables (IRS Circular E)that calculate the amount you must withhold once you have established the appropriate amount of taxable wages.
Also, most of your state and local governments require withholding, too, so be sure you request a similar payroll tax publication from them (most have them online).
All states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming impose a personal income tax.
Some employees may ask you to withhold an extra amount. Have them put the extra amount they want to be withheld from each paycheck on line 6 in their W-4.
For most employees, you will be matching and withholding FICA tax. See this page for exact amounts and procedures for withholding Social Security and Medicare tax (FICA).
You report and pay federal unemployment (FUTA) tax separately from Federal Income tax and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Refer to Publication 15, Employer’s Tax Guide (PDF), for more information on FUTA tax.
The taxable wage base varies from state to state with State Unemployment (SUTA) Tax, so check with your state tax and revenue department for details.
Check with your state department of labor to see if you are required to pay sick days, orientation time, etc. If it is not a requirement, decide if this is something you want to offer your employees. Also, check your local overtime laws.
Additionally, check into the requirements of providing Worker’s Compensation.
While you are checking out your labor laws, you may also want to check and see if your state has a special deal for small businesses that want to offer their employees health insurance.
Prepare and file payroll tax returns. The IRS requires that you file a quarterly Form 941, reconciling the amount of tax you owe and the amount you have paid.
This form is due by the end of April for the first quarter payroll taxes, end of July (2nd Q), end of October (3rdQ), and by the end of January for the fourth quarter payroll tax.
Most states have their own payroll tax forms due in the same month as the form 941s. Oklahoma’s is a WTH10001 (Oklahoma Wage Withholding Tax Return) and is due by the 20th of the month following the close of the quarter (April 20, July 20, Oct. 20, and Jan. 20).
Prepare annual W-2 forms each January for all of your W-2 employees, showing how much they were paid and summarizing their withholding for the previous year. These forms are filed with the Social Security Administration, and copies are sent to your employees.
Last of all, make sure you have a secure and private place to store payroll information. You will need a file for each employee, with records of all deductions and all pay calculations and payments. If you are audited, you will need to show these records, and they must be complete and accurate.
I know it sounds overwhelming; but, it is not if you have a very small basic payroll. It does not take long to do each step, and the extra money you save by doing it yourself you can put towards building your small business.
However, if you are uncomfortable or unsure about doing it yourself, check with other small businesses in your area and find out what payroll service they use and would recommend.