It is nothing less than a milestone if you are at the stage of setting up a payroll account. You started a small business that became successful, and now you are ready to employ a few people. Making a job opportunity for someone else is a significant achievement, but if you are doing it for the first time, you might be feeling nervous.
Some crucial elements need to be taken into consideration to avoid fines and Internal Revenue Service penalties. This article explains in easy language how you can create your very own payroll account so that your small business can grow.
Definition of a payroll account
A payroll account is strictly used for a business and is kept separate. Rather than lumping all your expenses into your account, you can pay for workers with your payroll account. The cash going into the payroll account will only be utilized for payroll.
For instance, you cannot compose checks to vendors from the payroll account because you can only do it via the main business account.
Most companies that utilize the payroll account print out the payroll summary report after each pay period ends. The things mentioned in this report are deductions, net wages, gross wages of employees, and taxes. Your business will remain secure, consistent, and organized by having a payroll account.
Steps to create a payroll account
The following steps are the best tricks to meet all legal requirements in the payroll while saving time.
1. Get an Employer Identification Number (EIN)
Whether you are taking in one employee or 50, it is important to take the EIN from the IRS. This identification number reports documents and taxes directly to the IRS. The EIN also comes in handy when submitting information regarding employees to the big state agencies.
The application for EIN can be made online, or you can talk to the IRS as well. EIN is also called Form SS-4 and Employer Tax ID.
2. Give attention to the paperwork of employees
The employee paperwork contains an important document that needs to be filled. This document is called Federal Income Tax Withholding Form W-4. When your employees submit this form to you, you can determine the accurate federal income tax from their checks.
You need to be meticulous and fill out all required forms accurately to make no mistakes. Before submitting the payroll tax, line up all lines and columns. Afterward, check thrice to see if all lines relate to the payroll reports and financial statement. You can not afford any mistake because it will cause a loss of money and time.
3. Difference between Employee and Independent Contractor
As an employer, you need to be conscious of the difference between the two even before adding up the payroll numbers. This is a tricky step because, in legal terminology, the line often gets blurred. Also, know who are the part-time and full-time employees.
Resultantly, this affects how you should pay the Social Security and Medicare taxes, withhold income tax, and give the unemployment taxes. If you can grasp the difference between the independent contractor and employee, you can efficiently carry out all these legal tasks.
Knowing these differences will let you understand how much you owe each employee. If you cannot understand the difference on your own, you can take help from the IRS by filling out the Form SS-8 first.
There can be penalties and pay interests in the long run which can cause havoc on your business, so be mindful of this aspect and classify employees accordingly.
4. Local / State IDs
You need to check whether there’s a need to obtain ID numbers to process and pay taxes because a few local governments and states require this form. You can talk to your state official or local government if there is a need for the additional tax ID number.
5. Document all Employee Compensation Terms
While setting up the payroll, there are some things you should ponder upon. This includes tracking the employee hours, paying overtime if you have been given the option, and handling paid time off, which is not legally required, but usually, small businesses offer it.
These business variables are necessary to determine before you hire. Moreover, the business deductibles, including retirement contribution and health plan premium, must be cut from the employee check to pay it to the respective organizations. These compensation details are necessary to decide so that no disagreements arise in the future.
6. Set a Pay Period
Your employees will look forward to this day, but how should you go about it? Even if you have already manually processed the pay period by deciding if it will be monthly or bi-monthly, know that state law sometimes decides this aspect.
The state law mostly vouches for bi-monthly paychecks. Moreover, the IRS demands the employer to withhold the income tax according to the time period whether the employee has worked full period or not. Before deciding on the pay period, there are other factors to keep in mind.
For example, when is the pay period best suitable for you? Most small business owners have the payroll as the biggest expense, and you need to check if the payroll will bring up any cash flow issues. So pick a schedule which you are most comfortable with as an employer.
But also keep in mind the needs of your employees. Some of them might be facing financial instability if you pay monthly. Therefore, talk directly to your employee team and see their preferences. Remember that payroll is just for your team as they offer labor on credit.
7. Choose the method of Payroll System
Before creating the account, it is best suited if you do your research so that you can realize the number of options you have. The Payroll administration is very detail-oriented, and it follows all matters accurately in a professional manner, so you don’t want to seem ignorant in these matters. Usually, the choices available for managing the payroll account are outsourced or in-house.
But know that whatever choice you choose is the employer, the responsibility of paying and reporting the payroll taxes fall on your shoulders. You can ask the business owners in your vicinity for tips or advice as well. It is advisable to read the reviews of successful entrepreneurs and what they have to say regarding each option.
8. Keep the Records accurate
There are some records that you should keep safe as ordered by some of the state and federal laws. For instance, the W-4 form that showcases tax withholding status should be kept secure for the current employees. After an employee is fired, these specific forms including the W-4 should be kept on file for three years.
Other such documents include copies of filed tax forms, tax deposit amounts, dates, W-2s, etc.
9. Note down your Employee team information
Another responsibility which you need to bear as an employer is to keep track of the specific details of the employees so that you can file reports and submit taxes properly.
The details which you need to look out for are: Full name, the dates for the starting of employment and termination both, date of birth, current residence address, tax filing number or the Social Security number, Form I-9 so that you can determine the eligibility to hire the person and W-4 for employees whereas W-9 for the independent contractors.
10. How to run payroll
After collecting all the documents and information, the time for running payroll arrives. According to the payroll system that you chose, you will either have to submit information to the accountant or enter it independently.
11. Report the Payroll taxes
You need to provide some payroll tax reports to the suitable authorities on annual or quarterly periods. To know the process of doing this, you can visit the Employer’s Tax Guide by IRS, which reveals clear information and instructions on the requirements for filling the federal taxes. Or you can go to the state tax agency to know about the tax filing specifications.
Be a disciplined employer by fulfilling all regulatory and legal responsibilities through the payroll account. You can save a big chunk of your time and efforts as well. If you want to be more effective with your payroll, follow some practices that successful owners rely on.
For example, process the payroll punctually each time. If you process it daily, not only will your employee team be satisfied but there will be no chance of underpaying or overpaying.
A payroll account guarantees consistency because you only have to deposit the money which is sufficient for covering payroll. One can easily know about the payroll expenses which means you do not have to be anxious about any overdraft.