As a new business owner, hiring will be one of your first steps. Yet, how will you pay them? Before even acquiring new employees, its essential to have know how you will pay your employees. Here’s what you need to know before tackling payroll.
Hiring employees means paperwork.
- Get an Employer Identification Number from the IRS. Use it to report taxes to the IRS and state agencies.
- Obtain a state or local business ID if necessary. Contact local and state government officials to see whether you need an additional tax ID number.
- Obtain essential information from each new hire. You’ll need a Social Security number or an Individual Taxpayer Identification Number. Make sure you get each employee to fill out Form I-9 to verify employee eligibility. For proper payroll processing, each employee will have to fill out Form W-4 as well.
Keep An Eye On Classification
Of course, like many companies, you may have a mix of staff employees and independent contractors. You can’t blur the line between them, and you need to be aware of the different rules and paperwork for each group. Consult an employment expert and work with IRS Form SS-8, which can help you decide. One of the biggest differences between an employee and an independent contractor is the employer’s requirement to withhold and pay payroll taxes. If you make a mistake here, the penalties can be severe.
Also, the Fair Labor Standards Act requires employers to make a distinction between employees who are subject to its provisions and those who are not, i.e., exempt and nonexempt employees. One of the key differences is that nonexempt employees are entitled to overtime pay while exempt employees are not. Again, the distinction can be complex, so work with a qualified expert.
Set Up The System
First, consider a pay period. Weekly, every other week, and twice monthly are common options. State and local laws may limit your choices. Also, consider what your employees might want. For example, accounting departments often like twice monthly because it means 24 even periods, while every other week means 26 payments — it doesn’t divide evenly into a year. Still, employees often like their paychecks on the same day of the week.
Whatever you do, be transparent. Share important details about the process with employees: how they’ll be paid — check or direct deposit — and any deductions they should know about. Add these details to your employee handbook.
Finally, consider how you’ll handle payroll. Once you get more than an employee or two, it will start taking up increasing amounts of your time and energy to ensure you are making the right calculations for issued checks or direct deposits. That’s why many companies choose to outsource the entire payroll function. If you do choose to do that, make sure the provider you hire can meet your business’ particular needs.
This is just an overview of the many payroll obligations you will face. Our team of qualified accounting professionals can keep on top of all your responsibilities if you’d like to outsource this complex accounting function. Contact us for more information.