• January 27, 2016

The Small Business Guide to Payroll

The Small Business Guide to Payroll

There are many reasons to get payroll right from the start. First of all, you don’t want to mess up as an employer from a regulatory or legal perspective. And that also means not incurring the wrath of the IRS in penalty charges. It means that you save time in the long run by not having to clean up any messes down the road. It also keeps your employees happy (and paid) – which really is critical when you’re running a business. But you already know that. Let’s get started.

The Basics

To get your payroll set up, you need to be prepared to share a bunch of company info. Most of this you should be able to rattle off quick – your official/legal business name, all company locations, number of employees. Other stuff, you might need to acquire:

Know your company bank account numbers – You’ll need this for direct deposit & tax filing info. Refer to the bottom of your company checks or in your online account details if you’re unsure.

You need an employment identification number (EIN) from the IRS, otherwise known as Employer Tax ID or as Form SS-4. You should get this in place before hiring employees for reporting taxes and other documents that will go the IRS. You can apply online directly with the IRS.

You will also need a state tax ID number. Easy enough, you can just enter your EIN into the state application.

Employee Checklist

You need to know a certain number of things about your new employee and also have them fill out certain forms for tax purposes. Here’s a good checklist:

  • Are they a full-time salary employee, part-time hourly employee, or independent contractor? Ultimately this is a question that you will need to be clear on for taxes – it impacts what you can withhold – income, Social Security, Medicare, and unemployment taxes. If the contractor is a business, you might also need their EIN.
    • Common mistake: Misclassifying employees is a huge, common problem. You must issue a 1099 form if you work with a vendor or contractor that provides a certain amount of hours of services to your business.
  • W-4 forms. Get in the habit of having new employees fill these out on day 1 so it doesn’t get lost in the onboarding shuffle. Here you go.
  • Determine your pay period. Some states require bi-monthly. Depending on your revenue cycles, you’ll want to optimize the date that employees get paid, but make sure you follow your state laws. Here is a chart that lists out the pay period requirements by state.
  • Lay out your compensation terms & benefits. This includes salary for full-time employees, hourly wage for part-time or contractors, bonuses, commissions, overtime, sick & vacation policy, etc. Also, what benefits are you offering to your employees? Consider health and dental insurance, 401(k), retirement plans, and a flexible spending account. If you aren’t covering these outright, you need to make sure the terms of employee contribution are set up in payroll for paycheck deduction. You also might need to set terms for other outlying employee reimbursement considerations, such as for travel and mileage, learning/training budgets, and allowances for situations like client dinners, etc.
    • Common mistake: Don’t mistake awards & benefits as non-taxable, as they frequently should not be excluded from wages with the IRS. Technically, gifts or gift cards are equal to money, and should always be accounted for as taxable wages.
  • Direct deposit is standard. While fees may apply to the business, most employees expect in this day and age to get their paycheck deposited into their bank account. You’ll need their bank routing number and account number, and possibly a voided check depending on your payroll provider.

Choosing a Payroll Provider

Most startups and small businesses are outsourcing payroll services, especially with a growing team. If you haven’t read it yet, check out our piece on “How to Pick the Right Payroll Provider.”  There are many options, but here are some of the top software/SaaS providers for startups and small businesses:

  • Gusto – formerly Zenpayroll, offers online payroll, health benefits, and workers’ comp in one integrated product.
  • Zenefits – more complex, yet free, online HR Software that offers a single place to manage all HR needs – payroll, benefits, compliance and more.
  • ADP – ADP provides comprehensive payroll services and human resources management solutions for businesses of all sizes.
  • MassPay – MassPay offers small and mid-sized businesses a full suite of HR and Payroll products and services to support their needs, including: web-based and paperless payroll HCM & payroll solution workers’ compensation; property and casualty insurance time and more.
  • Paylocity – Provider of cloud-based payroll and human capital management software solutions for medium-sized organizations.
  • Intuit – A wide suite of products from Quickbooks to online payroll, Intuit works with many small businesses.
  • Advantage Payroll Services – a localized professional will offer personalized and often in-person service.

Tax Checklist

According to Bloomberg Business, small businesses have a huge problem with payroll taxes. In fact, the IRS made $4.5 billion off small businesses in 2013 based on the 6.8 million penalties to they issued related to employment taxes. Could you be penalized?

Officially, here are all of the penalties the IRS takes into account and the fraud procedures as a result. Even if you outsource or leverage software to handle your payroll, we recommend consulting with an accountant to cover you on payroll taxes. You’ll want to avoid common mistakes, like not knowing:

  • how to maximize your tax deduction
  • how frequently to pay and file taxes to avoid penalties
  • the amount & period of time a business has before they need to deposit taxes (typically required to deposit on a monthly or semi-weekly schedule)
  • tax implications for when an individual exercises stock options (you must deposit employment taxes within one business day of the settlement)
  • and much more

Important Tax Dates

  • Form deadlines – February 1, 2016
  • Filing with paper forms – February 29, 2016
  • E-filing – March 31, 2016
  • The shareholders who pay tax on the corporate income are subject to the same deadlines the IRS imposes on individual taxpayers – April 15, 2016.

If you have more tax questions, we recommend reading the valuable resource we pulled together, The Ultimate Tax Prep Guide: Tips & Resources for Businesses.

Finally, be diligent with your records, especially if you aren’t leveraging outside software to keep track of your employee payroll and tax documents. For instance, a huge mistake that can come back and haunt you – you must keep W-2s, copies of filed tax forms, and dates and amounts of all tax deposits, as well as all W-4 forms on file for all active employees and for three years after an employee is terminated.

Wondering if there are other payroll mistakes you’re making? Intuit pulled together a great resource listing the top 10 payroll mistakes and what to look out for.

Any questions? Need help with payroll questions or looking for special offers from payroll providers? Ask VENTUREAPP. We’re happy to help.

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