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Congratulations on building your business — hiring your first employee is a big accomplishment! Getting everything correctly set up for payroll is key to setting yourself up for future success.
While there are a few steps you’ll need to take to get started (and stay compliant with the taxman), they’re all pretty straightforward. Here’s a step-by-step guide to help you get payroll right for your small business.
Register with the IRS
First, you need to get your business set up with all the necessary government agencies. Start by registering with the IRS to obtain a Federal Employer Identification Number (EIN). You’ll need this number to submit tax payments and your employees will need it when they file their own taxes. Think of it as the social security number for your business.
Register with your state
Next, check with your local agencies to see what state ID numbers you need for tax purposes. For most small businesses, state and local registration is simple. But, if you have remote employees in other states, you may have a few extra steps. Depending on the state, your employee may have to pay taxes in their home state, the state your business is based in — or both. That means you’ll need to register in any state where you have employees for and are withholding taxes.
Collect employee information
Once you’re registered, it’s time to collect information about your employees. You’ll need the following:
- Full name
- Employment start date
- Social security number (or EIN)
- Birthdate
- Current address
- Pay rate (and overtime rate if applicable)
- Form I-9 to verify eligibility to work in the US
- Form W-4 (or W-9 for contractors)
Employee classification
Correctly classifying your team members as employees or contractors is a crucial step in the payroll process. It can be an attractive option to hire only contractors, but misclassifying an employee as a contractor means you’re not withholding and paying required employment taxes. This can leave you owing back taxes, interest, and some significant penalties. Check out the this breakdown of the breakdown of the IRS guidelines to make sure you’re doing it right.
Choosing a pay schedule
How often you pay your employees is another choice you need to make. It could be monthly, bi-weekly, or weekly, depending on your company’s needs. There may also be labor laws in your state limiting your option to pay your employees monthly, so make sure to check. The most common pay schedule is bi-weekly.
Calculate payroll taxes
Time for the math! For each pay period, you’ll need to figure out taxes and withholdings for each employee — and the matching payments that you, as the employer, need to remit. The actual payroll calculations are pretty simple, but there are a lot of numbers to juggle, so you may want to consider getting outside help to keep everything straight.
Once you’ve got the numbers figured out, you’ll be ready to cut checks to employees or make a direct deposit payment to their bank accounts. The income taxes you withheld and the employment taxes you’re accountable for must be paid electronically either quarterly, monthly, or semi-weekly. The frequency depends on the amount of your payroll tax liability, with larger amounts requiring more frequent deposits. Check the IRS guidelines to see which schedule you need to use for your business, or see a detailed list of pros and cons.
Depending on who you’re paying and how your business is structured, you may need to send in state tax payments annually, quarterly, monthly, or even semi-weekly. Check with your state’s tax agency to find out. If you have employees working in other states, you could need to make tax deposits for multiple states on different schedules, so it’s important to keep track.
Calculating payroll manually may be an option for the smallest companies, but it can get complex pretty quickly. Consider working with your accountant for payroll services since they already have access to your books and know your business well. That way, the pros can calculate wages, run the payroll, and submit the tax payments for you — and let you focus on your business.
This article was originally written by OnPay, a payroll company we partner with to help you get more of your to-dos done.
Talk to us and see how easy it is to offer payroll services your way.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.