No matter the number of employees that your business has, implementing and maintaining an effective payroll system is essential. When set up properly, satisfying the individual needs of your business and leaving room for growth — a proper payroll system can streamline the ability of your business to ensure legal and tax compliance, not to mention save time and the headache of dealing with IRS penalties.
10 Tips to Ensure a Proper Payroll System
- Get an EIN. Before you can legally hire any employees, obtain an employment identification number (EIN) from the IRS. This EIN is commonly referred to as an Employer ID, Tax ID or in accounting terms, a Form SS-4. This is essential in order to report taxes and submit documents on behalf of your business to the IRS and state agencies.
- Get State and/or Local IDs. Depending on the location and industry that your business operates, you may also need to acquire individual state and/or local IDs as well.
- Independent Contractor or Employee? Get familiar with the difference between an independent contractor and an employee. This will be vital in order to maintain accurate bookkeeping and tax records. Independent contractors are responsible for filing their own taxes. As an employer, this distinction will also determine your responsibility to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes.
- Have compensation terms spelled out in advance. Employee Compensation Terms should be detailed and documented in the employee file. Setting up your payroll system should include terms for paid time off (not a legal requirement, but offered by most businesses), tracking hours, overtime, and any other aspect that you want to include. Be sure to include deductibles such as health plan premiums and retirement contributions as well.
- Weekly? Bi-weekly? Bi-monthly? Determine a suitable payroll period for employees. While you are in control of this, some states do have pre-established payroll terms. The IRS also requires that you withhold income tax for that time period even if your employee does not work the full period.
- Get employee paperwork filled out ASAP! Ensure that all employee paperwork is fully completed and filed promptly. You should have a Federal Income Tax Withholding Form W-4 for all employees on file. This ensures that the correct amount of federal income tax is withheld from their paycheck.
- Choose a payroll system. It should cater to your industry needs. An effective payroll system requires attention to detail and accuracy. Many payroll solutions are customized to your industry.
- Input payroll information. Once all forms and information are collated, you’re ready to start running payroll. Depending on which payroll system you choose, you’ll either enter it yourself or give the information to your accountant.
- Keep accurate paper trails. Federal and some state laws require that employers keep certain records for specified periods of time. Keep in mind that paperwork must be kept on file for active employees and for a period of three years after an employee is terminated. You also need to keep W-2s, copies of filed tax forms, and dates and amounts of all tax deposits.
- Submit your reports on time. There are several payroll tax reports that you are required to submit to the appropriate authorities on either a quarterly or annual basis. If you are in any way confused about your obligations, take a look at the IRS‘s Employer’s Tax Guide, which provides some very clear guidance on all federal tax filing requirements.
Not every entrepreneur and small business is equipped to — or should — handle all this themselves, and that’s okay. There are many options to outsource this kind of work. Once that’s in an expert’s hands, you can rest easier knowing it will be handled properly, while you focus on the next big idea to make your business a success.
By Justin E. Crawford