A Beginner’s Guide to Setting Up Payroll for the First Time
Are you bringing on your first employee? First of all, congratulations! Hiring your first employee is a new and exciting time and means your business is moving in the right direction. However, it’s important that you are properly setting up your payroll function to maintain happy employees and compliance with regulatory agencies.
Setting up payroll for the first time involves various steps, each of which is important. In this article, we will outline the basics you need to know about setting up payroll in your business. If you are still confused, don’t hesitate to reach out to one of our team members.
Differentiate Between Employees and Independent Contractors
Before you go through the tedious process of setting up your payroll function, you need to determine what type of worker you have. There are two main types of laborers: employees and independent contractors.
Employees get paid through payroll with payroll taxes and benefits being offered. On the contrary, independent contractors get paid a flat amount, with no obligations on your part.
The IRS outlines three main tests under Common LawRules to determine the type of worker you have:
1. Behavioral: Do you control the duties of the worker? If so, you have an employee.
2. Financial: Do you control how the worker gets paid? If so, you have an employee.
3. Type of type ofTypeof Relationship: Does the worker have access to company benefits, like health insurance? If so, you have an employee.
If you are hiring an independent contractor, you don’t need to go through all of the next steps. However, be sure you are properly classifying your workers. The IRS doesn’t hesitate to assess back taxes with penalties.
Register With the Appropriate Agencies
Once you’ve determined that you are hiring an employee, you will need to register with the appropriate agencies. Employers are required to remit both the employer and employee portion to state and federal agencies. This can include FICA tax, federal withholding, state unemployment, federal unemployment, and state withholding.
If you are a single-member LLC or sole proprietorship, you may not have a FEIN yet. You will need to apply for a separate identifying number with the IRS to complete registrations. It’s important to note that you shouldn’t begin withholding tax from employees until you have completed all of the necessary registrations. There can be fines and penalties associated with withholding taxes from employees without the proper authorization.
Determine Your Pay Schedule
Registrations with regulatory agencies can take a few weeks. In the meantime, you should be refining the details of your payroll function. This includes determining a payment schedule. Common pay periods include weekly, bi-weekly, semi-monthly, and monthly. Many employers refrain from paying monthly because it can be harder for their employees to manage their money.
To determine the payment schedule that works best for your business, you need to consider your cash flow. When do you receive money from customers? Is it weekly or every other week? If you only receive large invoices every few weeks, it can be difficult to maintain enough cash for a weekly pay schedule. Keep in mind you will need enough cash on hand to cover both the employee and employer obligations.
One of the perks of working at a company is its benefits. You should put together a list of benefits that you want to offer. This could include insurance, auto allowances, and retirement matches. Many of these benefits require separate registrations, making it important to partner with an expert.
If your business isn’t big enough to offer a comprehensive benefits package, consider allowances. Instead of offering health insurance, you can offer a health insurance allowance, which offsets a portion of the fees associated with employees maintaining their own coverage. This incentive can attract talent to your company without having to hold full policies.
Collect Tax and Benefit Information from employees
Before you process your first payroll, you need to obtain information on tax withholdings and benefits from employees. Employees can choose how they want their payroll taxes withheld through Form W-4. There are also state withholding forms, but those will depend on the state your employee resides in.
At a minimum, you should have your employee’s legal name, address, and social security number. This is the information needed to issue year-end tax forms. Additionally, if your employees are opting out of benefits, that election should be in writing.
Process Your First Payroll
After you’ve completed all of the previous steps, you are ready to process your first payroll. Take your time on the first payroll. You may find mistakes that were made in the set-up process. Moreover, you shouldn’t be processing payroll by hand. Instead, invest in software that calculates the taxes and net pay for you.
Many accounting programs, like QuickBooks, have a payroll function that handles a majority of the work for you. All you need to do is input the hours or pay. This can take a major burden off your plate when it’s time to process payroll.
Issue the Right Year-End Forms
Your job isn’t done after you process payroll. In fact, payroll leads to different tasks throughout the month, like paying withheld taxes to regulatory agencies. These agencies will give you a defined schedule that you need to remit taxes by. This is generally monthly for small businesses.
In addition, you are responsible for issuing year-end tax forms to your employees. Independent contractors will receive Form 1099-NECwhile employees will receive a W-2. These forms need to be issued by the end of January, making it important to keep detailed records throughout the year.
Do you feel comfortable setting up your payroll? If so, great! If not, reach out to one of our team members at Bookkeepmetoday. We can help you navigate the entire process, from registering with agencies to processing your first payroll. Reach out today to learn more.
IRS. “Independent Contractor (Self-Employed) or Employee?” IRS, 17 Jan 2023, https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Accessed 2 Mar 2023.