Every small business essentially has two customers: its paying customers and its internal customers (a.k.a its employees). For any business to thrive, it’s important that employees are well taken care of, which includes the security of knowing that they’ll get paid the correct amount they’re owed, regularly and on time.
As an employer, you have certain tax responsibilities like making sure that you’re not only paying your employees their wages, but that you’re also withholding the correct amount of taxes from their checks. You’ll also need to determine which tax returns you need to file for your business every year.
“Some employers are still manually calculating employees’ paychecks every month,” says Ben Becker, Payroll Implementation Manager at Rippling. “Which fundamentally tells you that calculating payroll tax is something that you can do with a calculator, but it doesn’t mean that you should.”
All to say: setting up a payroll process for your company is a necessary task, but it doesn’t have to be a daunting one. Here are the six basic steps to getting your payroll process up and running.
Some employers are still manually calculating employees’ paychecks every month, which fundamentally tells you that calculating payroll tax is something that you can do with a calculator, but it doesn’t mean that you should.
Implementation Manager at Rippling
1. Apply for Your Employer Identification Number (EIN)
First, you’re going to want to register for an Employer Identification Number (EIN) with the federal government. EINs are a tax identification number issued for the purpose of tax administration by the IRS.
How do you know if you’re eligible to apply for an EIN? If your principal business is located in the United States or one of the U.S. Territories, then you’re eligible. The application will also require information such as:
- Responsible Party: This should be the name of the primary owner or operator of the business.
- Taxpayer Identification Number (TIN): The person named the Responsible Party will need to have a valid Taxpayer Identification Number. This is usually a Social Security Number (SSN), but an ITIN or another EIN is sometimes also acceptable.
For more information on current tax and withholding rates, check out Publication 15 (Circular E) — The Employer’s Tax Guide which the IRS updates every year. The good news is, once you’ve secured your EIN, the number is yours forever.
2. Confirm State and Local Tax Regulations
Like we mentioned, as a small business owner and employer, you’ll be responsible for collecting—or more accurately, “withholding”—taxes like federal, state, and sometimes even local or municipal taxes from your employees’ paychecks. There are also federal payroll taxes that fund programs such as social security, unemployment, and Medicare Part A, the cost of which employers and employees share. Staying on top of these tax regulations and calculating them correctly is crucial because it’ll spare both you and your employees from a potentially costly tax bill later on.
Similarly, employers are expected to withhold income and unemployment tax at a state level. Bear in mind that some states, such as Alaska, may have slightly different rates and regulations, so it’s important that you do your due diligence and check state regulations for each place that you’ve hired employees.
If you plan on hiring employees from different states, it’s a good idea to get into the habit of checking state tax regulations beforehand so you’re not blindsided come filing time. Local taxes can vary as well, and they’re usually used to cover municipal costs like funding schools and regional transit and transportation systems.
3. Distinguish Between Employees and Independent Contractors
In any payroll system, you’ll need to demarcate your full-time or salaried employees from part-time contractors and hourly-based workers. This distinction is important because the status of an employee will determine their pay schedule, which in turn affects how you’ll report your taxes.
It comes down to a tale of two forms. According to the IRS, an employee is someone who maintains a permanent position at the company and receives a designated salary. Once a year, you’re required to provide employees with a W-2 form that contains an itemized record of the employee’s pay, tax withholdings, deductions, and benefits.
On the other hand, contractors or freelance workers—who get paid varying amounts at various times—will not only require you to process payments more frequently, they will also require you to provide a 1099 form (unless the contractor has been paid less than $600 by the company for the year).
If you employ mostly salaried workers, I would highly recommend automating your payroll. If you have hourly employees that you pay on a weekly basis, you can automate that too, but you’ll probably want to check that those numbers are accurate since they’re more flexible and get paid out more frequently.
4. Prepare Employee Documents, Including W-4 and I-9 Forms
Good recordkeeping is fundamental to being a responsible employer. Aside from maintaining accurate accounting and financial records, employers also need to make sure to have two specific forms on file for each employee:
- Employee’s Withholding Certificate (W-4): Ask all new employees to complete their income tax withholding form (W-4) before they start work. Make sure that these withholdings are applied to their very first payment. According to the IRS’s website, “If a new employee does not give you a completed Form W-4, then withhold tax as if the employee is single.” If your employees have questions about how much tax to withhold, you can refer them to the IRS tax withholding estimator.
- : As the name suggests, all employees working in the United States must complete Form I-9 to signify that they are authorized to work in the country. Meanwhile, all employers are required by law to have this information on hand in order to help verify an employee’s identity and eligibility for work.
It’s of the utmost importance to remember that Form I-9 can only be presented to a prospective employee after they have signed their job offer. This is a measure to prevent employers from discriminating against candidates based on their immigration status.
Another thing to be aware of is that most payroll processing systems will provide you with the right tax withholding rates. “Some payroll systems allow for the override of those numbers, but I wouldn’t recommend changing them,” says Ben.
5. Choose the Right Platform to Manage the Process
Gone are the days of spending late nights tallying employees’ wages with nothing but a pencil, paper and calculator in hand. These days, payroll processing platforms can help do a lot of the heavy lifting (while ensuring a higher degree of accuracy, too).
Investing in a payroll processing system is especially handy when you lack the time and personnel to oversee the job. An added bonus is that a good payroll platform can sync with other HR and recordkeeping systems so that business owners can keep employee records accurate and up-to-date with less effort.
But it’s automation that often sets a good payroll processing platform apart. From automatic compliance to automatic tax-filing, it’s wise to choose a platform that gives you a one-stop shop for payroll processing and administration.
“If you employ mostly salaried workers, I would highly recommend automating your payroll,” says Ben. “If you have hourly employees that you pay on a weekly basis, you can automate that too, but you’ll probably want to check that those numbers are accurate since they’re more flexible and get paid out more frequently.”
Then there’s the practical reason that matters most to small business owners: a payroll processing system can save you a lot of money by protecting you from potentially high cost fees and fines incurred from misfiled taxes.
Think of it this way: One missing employee form or even a small error in tax withholdings from an employee’s wages could amount to big expenses for your business. A good payroll system will spare you time in the short-term and save you money (and headache) in the long-term.
6. Maintain All Required Records
Employers are expected to abide by what’s known as a burden of proof for business taxes. That means that business owners must be prepared to present documentation to the IRS when called upon. These can include receipts and expenses, bank statements, invoices, tax returns, and payroll records.
How long do you need to keep your records handy for? Most accountants will advise you to retain records for at least seven years, since the IRS and Department of Labor (DOL) each have varying mandates for document retention and they can technically ask you for documents reaching as far back as seven years.
Some of the common records that business owners are expected to retain include:
- Employee names and contact information
- Employee pay stubs
- Payroll tax records
- Cancelled checks
- Vendor contracts
- Operating license / Business registration
Modern payroll processing systems should be equipped with features that allow you to easily generate business reports and maintain clean, up-to-date records.
One missing employee form or even a small error in tax withholdings from an employee’s wages could amount to big expenses for your business.
Rippling Solutions Are Simple and Secure
The benefits of modern payroll processing solutions is that they can save you a lot of time on administrative overhead while also protecting you from hefty tax bills.
Take Rippling as an example. Our platform syncs with all your business’s HR data, so that your employee information and records are consistent and free of discrepancies. When payroll time comes around, all you have to do is click “Run” to get the process started.
Not only is Rippling secure, it’s a smart system too. Rippling automates compliance, ensuring that your necessary “burden of proof” forms and documents are in all in order. The system can also automatically file your payroll taxes with the IRS and other federal, state and local agencies, at the right time, every time.
Employees expect to be paid what they’re due, on time, and with Rippling that’s sure to happen. There’s also the added bonus that employees will be greeted with some lovely celebratory artwork to welcome their well-earned payday.
Being an employer comes with a lot of responsibility, but the right payroll processing system can make a complex process much more simple and effective for busy business owners and their valued employees.