The first step to know about managing payroll is to make sure your business meets all the legal requirements to operate as an employer. One of those legal requirements is obtaining an employer identification number, or EIN, to hire and pay employees. EINs are unique numbers (think the business version of a Social Security number) that you’ll use to report taxes and other relevant information to the IRS. Obtaining an EIN is a process that is done online through the IRS website. Your information will be validated during the online session, and you will receive your EIN immediately. Verify that your state tax identification number is the same as the federal number; if it is not, determine if you need to apply for one or if it is automatically assigned.
Once you have your employee identification number, you can choose the schedule that best suits your business and the decisions that will impact how you manage payroll. Here are some essentials to consider when setting up your payroll process.
The payment schedule lets you know how often you want to pay your employees. Do you want to pay them monthly, bi-monthly, or weekly? It’s up to you to decide what’s convenient for you.
Plan for important quarterly tax return dates, holidays, and annual tax return dates. Remember, you will need to do this at the beginning of each year. Also, find out how often you will have to pay taxes and what taxes you will be subject to. Will you have to pay state taxes? Local taxes? Find out the rates ahead of time so you know how much you have to withhold.
Payment options for your employees
It is essential to also establish each employee’s preferred method of delivery. Most companies typically use paper checks, direct deposits, payment cards, or cash.
Payroll processing and calculation
You need to determine how you will calculate payroll. Will you do it manually using Excel, a payroll service, or your point of sale software payroll system?
Once you have set up your payroll process, you need to collect some vital payroll documents each time a new employee is ready to start work. These documents consist of tax and work authorization forms that employees must sign. You will use the data on the forms described below to add the employee to your HR or payroll system. It is advisable to keep these files as hard copy paper documents or as secure electronic personnel files.
A W-4 form is the federal withholding document that tells you the correct federal income tax rate based on factors such as marital status, dependents, other employment or income, and deductions. It must be submitted by the employee on or before the first day of employment. Obtain a signed federal W-4 form prior to starting employment. Each time their personal or financial situation changes, your employees can complete and return a new W-4, and the IRS issues a new W-4 each year. These are two excellent reasons for employees to review their W-4 status each year. Encourage them to do so. Though as the business owner you do not need to submit it to the IRS, it’s important to file it away in your business records.
The state W-4 form is a tax document that works as a guide for employers to withhold a specific amount from each paycheck to pay state taxes. It works the same way as the federal W-4 form in that it informs your employer of your withholding requirements
However, there is a difference between the state W-4 forms and the federal W-4 form. All employees in the United States complete a federal W-4 form, but not all employees complete a state W-4 form. Tax withholding and form requirements vary depending on the state in which you reside. Make sure to collect a signed state W-4 for tax withholding and securely file it away as well.
The I-9 form is used to verify the identity and employment authorization of persons hired for employment in the United States. The form must be provided within three days of the employee’s start date. All U.S. employers must properly complete the I-9 form for each individual they hire for employment in the United States. This includes citizens and non-citizens.
The above list of payroll forms that employers will need is far from exhaustive. Other less structured forms may also be useful to help you organize your company’s payroll processes. While these aren’t typically the responsibility of the employer, it’s nonetheless important to educate your employees about any relevant forms that they may need.
- W-2 Form: This form serves as a report of total annual wages earned and is used for tax return purposes.
- Form W-3: Titled the Transmittal of Wage and Tax Statements, this form is used to report total wages and taxes for all employees.
- Form 941: The Quarterly Federal Tax Return form is used to report quarterly income and FICA taxes withheld from paychecks.
- Form 944: Also known as the Annual Federal Income Tax Return, this form is used to withhold Return of Annual Income Tax and FICA Tax from paychecks.
- Schedule H (Form 1040): For household employment taxes, this form serves as a return for taxes on wages paid to domestic employees (nannies, caregivers, etc.).
- Form WH-347: Called the Certified Payroll Form, this form is to report payroll information for employees working on federal projects.
After you’ve determined the number of hours an employee worked for the pay period, you can begin to perform payroll calculations. This includes gross pay, taxes due, deductions for insurance premiums and other benefits, and final net pay.
Calculate the employee’s gross salary
The employee’s gross salary is the amount you must pay them without any deductions. To calculate the gross salary, simply add up the regular hours (up to 40 hours per week) and multiply them by the employee’s hourly rate. Then add up any overtime hours worked during the pay period and apply the employee’s overtime pay rate to those hours. Regular hours are paid at the employee’s regular pay rate, while overtime is generally calculated at 1.5 times the regular rate of pay. If you’re calculating a salaried employee’s payroll, you will determine the total amount due for that pay period. If you pay yourself as an employee, include your salary.