Payroll is a crucial process for any business that works with employees or contractors. If you’re a new entrepreneur setting up payroll for the first time, the logistics can seem overwhelming. However, many solopreneurs and small business owners have found it worthwhile to tackle the payroll process on their own.
Taking the time to understand and accurately complete each aspect of the payroll process is crucial. Not only will it ensure you and your employees are paid on time, but it will also keep you in compliance with the IRS.
To help you navigate this process, here are eight steps to setting up your company’s payroll.
1. Set up an EIN with the IRS.
As a new business, your first step is to obtain an employment identification number (EIN) from the IRS. Your EIN, also known as your Employer Tax ID, is necessary for reporting to the IRS and any state agencies. Applying online is the fastest way to receive your EIN, as approved applications receive a number instantly. However, you can also apply via fax, mail, or by phone.
2. Check whether you need state/local IDs.
In addition to your federal EIN, some state and local governments require businesses to set up ID numbers before processing taxes.
3. Collect employee tax information.
Once you have your EIN and any state or local ID numbers, collect tax information from anyone who works for your company. Employees will need to complete a W-4 and an I-9, while contract or freelance workers will need to fill out 1099 forms.
4. Choose a payroll schedule.
After obtaining all the necessary tax information, you need to decide your payroll schedule. Most organizations opt for a biweekly (every other week) or a semimonthly pay period (typically the 15th and the last day of the month). However, businesses can also implement a weekly or monthly payroll, depending on their needs. Be sure to consult with your state laws regarding payroll schedules.
5. Choose a payroll system.
Choosing the right payroll system can make the process significantly easier. Services like Bookkeeper360 offer payroll support for small businesses, allowing them to focus on growing their company. Entrepreneurs who want to tackle payroll in-house can use these services to track their financials, while those who want to outsource the process can get full-service accounting on a monthly or weekly basis.
6. Calculate gross pay.
To calculate gross pay, take the number of hours each employee has worked, then multiply it by their hourly rate. While you can do this calculation manually, setting up gross pay calculations in a spreadsheet can save you valuable time in the long run, especially if you have a team of workers.
7. Determine withholdings.
If you have W-2 employees (rather than independent contractors), you will next need to calculate any withholdings, including deductions, allowances, benefits, and any federal or state/local taxes. Since these numbers will vary by employee and category, using a spreadsheet to automate calculations can keep everything well-organized.
8. Run payroll and keep records.
Once you’ve subtracted withholdings from gross pay, you are left with the net pay — in other words, what the employee takes home. Create a pay stub for each employee, then run payroll and keep a record of everything you’ve calculated and submitted. Keeping meticulous records can help you solve any discrepancies that arise.
For more information and resources for aspiring solopreneurs and small business owners, head on over to www.mydreambridge.com.
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