If you’re a new business owner, congratulations! Starting your own business can be a daunting process, but rewarding all the same.
Owning a business comes with a set of challenges and responsibilities — one of the most important of which is paying employees. There are software like TrackTime24 that can help you with this.
If you’re new to the payroll process, check out the rest of this blog for a guide on how to set up employee payroll.
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A Guide to Paying Employees and the Payroll Process
Establishing your business payroll is a rite-of-passage for any new business owner. The federal and state governments require all employers to compensate their employees accordingly. This means your employees must be paid according to local state law.
Luckily, this process has been made easy in today’s day and age with tools such as a pay stub creator and many other online payroll systems. Let’s break down the payroll process into simple, easy-to-understand steps:
Step 1: All Employees Must Complete a W-4 Form
This is a necessary first step so that your employees can document their filing status and keep track of personal allowances.
In short, the more dependents or allowances an employee has, the fewer payroll taxes are deducted from their paycheck. You need to file a new hire report every time you hire a new employee, and they must complete an up-to-date W-4 form.
Step 2: Apply For an Employer Identification Number (EIN)
In order to process payroll yourself, you must apply for an EIN and have it ready-to-go before any form of employee payroll is processed.
An EIN is important as it’s used by the IRS to identify your business entity and the employees who are owed compensation. Bear in mind that you may need to apply for a state EIN number too, so it’s important to check your state’s employer requirements.
Step 3: Apply For a State Business ID
A business ID number is important for tax processing. Some states and local governments may require you to have an ID before you can process any form of employee payroll.
You’ll have to check with your state government officials if an additional tax ID number is necessary, first.
Step 4: Gather Important Employee Information
As an employer, you are responsible for filing reports and taxes on behalf of your employees. Here are the important details you’ll need to gather from each employee or contractor you hire:
- Their full name
- Date of birth
- Current home address
- A tax filing number (social security number)
- A written document stating how the employee will be compensated
- An I-9 form to verify the employee’s eligibility to work in the United States
- A W-4 for full-time employees and a W-9 form for contractors
Don’t forget that all I-9 employee forms must be submitted for verification, too.
Step 5: Classify your Employees into Categories
This is the process of determining which employee qualifies as an independent contractor or a full-time employee.
Bear in mind that there are legal definitions of each, and it’s important to ensure each employee falls into the right legal category. These categories directly impact how each employee is compensated and how their taxes are withheld.
If you classify an employee incorrectly, this could land you in trouble in terms of owing payroll taxes. You may also have to amend your entire tax process and pay penalties or interest to the IRS.
Step 6: Choose the Best Payroll Schedule
Your next step is to decide when payday is going to be in the calendar month. There are three main considerations to keep in mind:
- What are the state requirements regarding constraints on when you run your payroll?
- What payment date works best for your business — consider cash flow and a convenient time for processing to suit you and your employees
- What would your employees prefer? Payroll is about compensating and taking care of your team, after all
Do some homework on what your employees actually need from you. Yes, you are their employer, but they are basically giving you their labor on credit! Talk to them and figure out a payroll system that works for you both.
Step 7: Pick the Right Payroll System
Choosing the right payroll system is literally make or break for your payroll processing. It’s the difference between streamlined payments and payroll nightmares.
Ideally, you should go for an online service that will save you time, while nailing down all the nitty-gritty details of employee payroll.
In order to find the best online system, do some research of your own by checking out online reviews. Make a decision on whether you should keep your payroll processing in-house, or whether it’s better to outsource it.
Step 8: Prioritize Tax Responsibilities
When it’s time to pay your employees, there are a few tax responsibilities you must take care of first. You’ll need to determine which state and federal taxes to withhold from your employees’ pay. This can be done by using the IRS Withholding Calculator.
Then, you must take note of the employee and employer portion of taxes. Make sure to submit your local, state, and federal tax deposits as necessary — this is usually on a monthly basis.
Your employer federal tax return must be processed and submitted to the IRS every quarter. This also includes any local or state returns where necessary.
Thinking About Starting Your Own Business?
We hope this blog on business payroll services and paying employees. has left you with some insight into what it means to run your own business. Becoming your own boss is not for the faint-of-heart, but it could turn out to be the best decision of your life.
If you’re looking for more inspiration on the topic, or other interests such as lifestyle, travel, career or home DIY, be sure to explore this site for more.