Payroll for Beginners: Everything You Need to Know Before Starting
You might wonder if there's a payroll for dummies guide to help you get your people paid quickly and accurately. Your payroll process performs a vital function; you need it to go right! Start with an understanding of the entire process, then partner with Duran Business Group to simplify your methodology so you can focus on other business areas.
No matter how well you stock snacks in the breakroom or how many perks you offer, such as sign-on bonuses and gym memberships, people won't stay if their paychecks are late or wrong. So, find out how to develop a well-run payroll process and why it sometimes makes sense to outsource this function with a trusted vendor.
According to the IRS, payroll errors cost companies billions of dollars annually. However, you can prevent this by better understanding how to run the payroll for your small business!
How to do payroll for small businesses
Here are the basic steps you'll need to follow to complete your payroll process:
- Keep paperwork up to date for all employees. Mistakes often occur due to incorrect contact information, Social Security numbers, and inaccurate bank information.
- Set up a schedule that works for your organization. Many employers pay biweekly or twice a month.
- Determine each employee's gross pay, remembering to align your payroll processes with salary versus hourly employment and other factors. For example, you'll need to track and pay overtime for eligible employees.
- Deduct Social Security, taxes, health benefits, and other reductions.
- Most employees choose direct deposit, but some companies still issue paper checks or have other distribution methods. How can you make payroll more convenient for your employees and company?
- Remember to document everything. Good record-keeping simplifies the tax process and enables fast, decisive action in case of a payroll dispute or question.
What do I need to run payroll?
If you're just getting started, there are a few essential steps to take in order to establish your business. This would give you the information you need to file taxes with local, state, and federal agencies. You need an EIN and state or local ID. In addition, you'll have to register your business to properly withhold family leave, unemployment tax, and other items, as follows:
- EIN: You need an Employer Identification Number (EIN) to file your payroll taxes. The IRS handles this, and it works like a social security number for your company. Fortunately, it's easy to obtain one by applying online.
- State or Local IDs: Find out if you need any other local or state government IDs. You can start with your state's Department of Revenue or Department of Taxation.
- Business Registration: Each state has its own process for registering businesses. You'll need to do this to withhold taxes and money for programs in your state. This may include FMLA and unemployment insurance, for example.
If you need assistance with payroll services, Duran Business Group can help. Our expertise includes far more than printing and distributing checks.
Gathering information on employees
Now you're ready to gather details about your employees. You'll need all the information necessary to pay them and collect taxes and other withholdings.
Here are some of the essential steps to set up your payroll process for success:
- Gather Employee Information: Typically, employees fill out forms to help them collect the information they need for tax and other purposes. Form W-4 includes each person's name, date of birth, address, and compensation. You also need to collect sensitive bank information from each employee for direct deposits. It's important to safeguard this information's collection, storage, and distribution inside or outside the company.
- Set up Employees and 1099 Contractors: Chances are good that your company will have permanent staff and temporary contractors. It's important to properly classify your employees and have them fill out the W2 or 1099 form to avoid fines and penalties associated with unpaid payroll taxes.
- Understand Exempt Vs. Non-Exempt: Exempt employees receive an annual salary and are unpaid for overtime hours. On the other hand, non-exempt employees receive an hourly wage, typically subject to overtime, depending on your state's laws.
- Set up Pay Periods: Determine how often you'll pay your employees. Many employers choose biweekly or monthly payouts for ease of processing. However, you may choose a weekly or biweekly schedule to be more accommodating.
How is payroll calculated?
It's important to consider all the factors when calculating the payroll for each employee. You must also calculate overtime hours and deduct any necessary amounts specified by the employee or authoritative entity (such as a court order for child support or the federal government for income taxes).
Determining Wages and Overtime
Running the payroll process for each person starts with calculating their gross pay. For example, non-exempt employees are paid an amount equal to the total number of hours worked times their hourly rate. On the other hand, exempt employees receive the appropriate portion of their annual salary. If someone earns $75,000 per year and you pay biweekly, they will receive $2,884.62 each pay period.
From gross pay, deduct the following items, which are usually itemized on the paystubs:
- Federal taxes
- State taxes
- Local taxes
- Benefits paid by employee (401(k), health insurance, FSA, HSA, etc.)
- Social Security
- Wage Garnishment (alimony, child support, etc.)
The remainder is the take-home amount your employee has to pay all their living costs.
How do I file tax withholdings?
The IRS requires businesses to pay federal income tax, Medicare, and Social Security every quarter. Use Form 941, the Employer's Quarterly Federal Tax Return, to file your payroll taxes on time. Filing late could result in a 10% penalty.
Learning to do payroll correctly affects many areas of your business, from tax planning to employee retention. Now that you know the basics of "payroll for dummies," it's time to find a partner that gets your business and has tons of experience setting up employee payment processes.
Contact Duran Business Group today to discuss your most pressing payroll questions and quandaries!