Getting Started with Payroll
When first starting, small businesses tend to have no need for payroll, as it is typically just the owner or owners doing the work. However, as a business grows, there’s eventually a need to hire employees. Those employees need to be paid and put on a payroll schedule. So, where do you start? Your city and state determine many factors, but no matter where you are, there are a few basic things that every company needs to start paying employees.
How Often Do You Want to Pay?
First and foremost, what kind of pay period do you want? When deciding on a pay period, keep in mind how often you’d need to be doing payroll. The time it takes to do it yourself will double if you do a weekly payroll versus bi-weekly. If you want to run a weekly or even bi-weekly payroll but do not have the time, you can always hire someone to do it for you. Most companies do stick to a bi-weekly schedule, however, there are the options of weekly, bi-monthly, and monthly. There are a few companies that have different types of employees on different pay periods, though this can be more complicated and more involved.
When Do You Want to Pay?
Once you’ve decided on a pay period, you’ll need to determine a payday. The most common are Fridays, but it is not unheard of for companies to have paydays on a different day of the week. In addition, some companies will pick specific days for paydays, such as the 1st and 15th of the month, which will cause variations in the weekday. However, this pay schedule is typically used for salaried employees or commission pay rather than hourly employees.
Keeping Track of Time – What are Your Options?
You’ll also need to decide how to keep track of time. The days of paper timesheets are a thing of the past. Many companies are turning to online programs, especially in the home service industry. There are programs, such as QuickBooks Time, where you can track your employees’ time and their location to make sure they are at the right job at the right time. There are many different programs out there with various features. Some require clocking in and out at the office. Some of them have apps as well as online portals for more flexibility. Be sure to do your research to find something to fit your business. Remember that you’ll need something to track more than just time worked. There’s also vacation time, sick pay, and any unpaid time off to think about.
Don’t Forget About Payroll Taxes!
After deciding on those, you’ll start paying your employees, but how do the taxes work? You will need to deduct Income and FICA taxes from employee paychecks. Income taxes are based on the employees’ W-4s. For FICA taxes, the standard deduction rates are 6.2% for Social Security and 1.45% for Medicare. And then there are the employer-specific FUTA taxes, covering unemployment. But what do you do with those deductions, how do you file, and how much do you pay?
You’ll file Income taxes regularly with the IRS, but how often is dependent on how many employees you have. So, you’ll file either on a monthly or semi-weekly basis. For your Income taxes, how much you pay changes with your employees’ income and filing status. You’ll file the employees’ income tax deducted from their paychecks along with your calculated amount using Form 941.
For FICA taxes, you’ll match the Social Security and Medicare percentages that the employees pay and use Form 940 for filing both your portion and the employees’. For Social Security, there is a maximum income that can be taxed. Any employees making more than $132,900 do not get taxed for Social Security. Medicare does not have a maximum income. However, income thresholds determine an additional 0.9% paid into Medicare.
FUTA taxes are paid by the employer only. These are used to fund federal unemployment programs. Employers are required to pay 6% on the first $7,000 earned by an employee for each employee. There are SUTA taxes, as well, that change by state. If SUTA taxes are paid on time and in full, it can help reduce the FUTA tax percentage to as low as 0.6%.
Be Careful – State and Local Tax Do Vary
State and local taxes are where you’ll need to look into your state and local laws, as they can be vastly different. Each state has its own tax filing websites for you to file your state income and other taxes. You can typically find these by going to https://www.irs.gov/businesses/small-businesses-self-employed/state-government-websites.
Peace of Mind
Payroll may seem like a difficult task when you don’t know where to start. However, payroll can become relatively simple with the proper guidance or through various available resources. If you decide payroll is not for you, don’t feel discouraged. As we mentioned above, there are options to hire an outside payroll service. Have peace of mind that employees are paid correctly, on time, and your taxes are properly filed.
