How to do Payroll for Your Small Business
Calculating payroll accurately is an essential aspect of operating a small business. You must be aware of labor laws and federal and state tax requirements before you hire your first employee. Creating and managing payroll processes can become complex because you have to factor in different calculations and deductions. However, you will be able to do payroll for your small business efficiently with the right guidance, professional advice and tools.
Satisfied employees are the lifeblood of small businesses. One of the main ways to show that you value your employees is to compensate them on time. The function of payroll is to ensure that your employees’ hours are tracked, paychecks are issued and the correct amount of tax and other deductions are applied. Another method of showing your satisfaction for your employees is by utilizing an employee scheduling platform that makes it easy for them to receive their schedules as well as swap shifts whenever they need to. Click here to start
Considerations before you start a payroll system
You need to make some business decisions before you start to calculate your employees’ payroll.
The following should be considered in order to create a precise payroll system:
- The difference between employees and independent contractors
How your workers are classified makes a big difference in relation to the way social security, Medicare, unemployment taxes and income are paid. Therefore, you need to ask yourself the following questions to help you determine whether a worker is an independent contractor or an employee:
Are you in charge of where, when and how the work is done? If the answer is yes, the worker is likely to be an employee.
Do you have power over the financial aspect of the work? For instance, do expenses need to be reimbursed? Do you make available work-related devices, like laptops? If yes, then the worker is possibly an employee.
Is your relationship with the worker ongoing or is the worker employed with you for a defined project without the anticipation of continued employment? Do you provide benefits, like health insurance, to the worker? In the event that you provide benefits and the relationship is ongoing, the worker is likely to be an employee.
- Pay period
When deciding on pay periods for your employees, keep in mind that the fewer pay periods you offer, the less complicated your payroll will be. However, you should contact your State Department of Labor because some states have regulations in relation to employee pay schedules.
- Payment methods
The payment method you use will depend on the type of industry your small business operates in. How you choose to pay your employees also depends on the number of employees you have, your accounting method and your available technology.
Here are some of the most frequently used payment methods:
- Check – Checks are cost-effective for small businesses because they do not cost much and they can also be traced.
- Cash – Small businesses can pay cash to contractors and temporary workers who handle odd jobs in cash.
- Pay cards – These cards function like debit cards and your employees can use them in ATMs.
- Direct deposit – This is a popular way to pay small business employees because it allows direct payment into bank accounts on a specific date. Direct deposits provide an efficient method of processing payment and it also gives employees the added reassurance that their pay will be available on a scheduled date.
- Employee time tracking
Tracking the hours worked by your employees is an essential aspect of your payroll system. Inaccurately tracking hours could result in either loss of profit or reduced employee confidence. An efficient time tracking system enables you to schedule working hours, keep a record of hours worked and avoid pay-related issues.
The ideal time tracking system will have features such as:
- Time clock and attendance
- Workplace communication.
- On-site clock-in.
Deputy’s workforce management solution contains the above features (and more) to provide you with an easy and simple way to schedule and track your employees’ hours. You can use Deputy across various locations and also sync it with your payroll solution. Book a demo and our friendly team will show you how to use Deputy and your payroll software to pay your employees accurately and on time.
- Payroll-related taxes
It is your responsibility to deduct the correct amount and type of taxes from your employees’ pay. You must also pay the taxes to the relevant state or federal agencies. There are many different types of taxes that small businesses are liable to pay, including:
- Federal tax
- Local and state taxes
- Medicare and social security tax
- State unemployment tax
- Worker compensation insurance
- Tax forms
It is a legal requirement for small businesses to file tax forms on time. Your tax form filing dates could be monthly, quarterly or yearly, depending on the size of your business.
The following are tax forms that you are required to file:
- Form W-2 for employees.
- Form 1099 for contractors.
- Form 941 – employer’s quarterly federal tax return.
- Form 944 – employer’s annual federal tax return.
- Form 940 – employer’s annual federal unemployment tax return.
- Overtime pay
By law, employees who work more than 40 hours per week are entitled to overtime pay. The Fair Labor Standards Act requires you to pay your hourly employees who work more than 40 hours per week, a minimum amount of 1.5 times their regular pay, for every extra hour worked. Different states have unique stipulations in terms of overtime pay. For example, California requires employers to pay their employees on a daily basis when the employee has worked more than eight hours.
- Payroll administration
You can select from a variety of ways to manage your payroll. The method you choose will depend on the size of your small business, whether you want to do payroll yourself and the amount of money you want to invest in this process. The main consideration for choosing how to administer your payroll is that it must be easy to set up and manage. Before selecting the way you want to manage your payroll, you should consult the IRS to familiarize yourself with all the requirements for collecting and filing taxes. Keep in mind the importance of payroll in terms of legal compliance, staff satisfaction and business profitability when selecting the method to administer your payroll.
Below are three common ways that are used to administer small business payroll:
1. Manual process
If you only have one or two employees, you can choose to do your small business payroll manually. Manual payroll is done by using a spreadsheet, like Excel. This spreadsheet will be used to track your employees’ hours, calculate taxes and process pay. Manual payroll processing is suitable for a small business owner who is confident using spreadsheets and knowledgeable about tax issues.
A benefit of using manual payroll processes is that it is free and provides the small business owner with complete control of their payroll.
The disadvantage of manually administering your payroll is that it takes a lot of time and there is a high likelihood of making mistakes. Errors in payroll can be very costly as you may be fined for filing inaccurate tax information.
You could opt to hire a professional to administer your small business payroll. Accountants are available for hire on a part-time, full-time or contract basis. Small businesses with a large number of employees may benefit from the services of a professional accountant.
An advantage of using an accountant to administer your payroll is that you can focus on growing your business while this complicated function is outsourced to a professional. Additionally, accountants are aware of various tax laws and filing requirements, so it is less likely that you will make mistakes in relation to your tax.
A downside to using an accountant for your small business payroll is that it can be expensive. Reputable accountants are not cheap, so this option may not be the best if you are trying to limit your outgoings. In addition, using an accountant means that you do not retain full control of your business finances.
Payroll software automates and simplifies your payroll processes. Firstly, you enter your employees’ information, for example, pay frequency, pay period and the number of hours worked. The payroll software will then automatically work out tax deductions for your employees. Due to its simplicity and cost, this type of payroll administration is becoming increasingly popular.
Selecting the right payroll software can greatly reduce the headaches associated with payroll. As the software is regularly updated with tax information, it is easy to deduct the right amount from your employees’ pay, every time. Good payroll software has the functionality to integrate with your staff scheduling solution. For example, Xero and Sage are popular payroll software that integrate with Deputy. Using software to administer your payroll is cost-effective, especially in comparison to using an accountant. Also, you are able to retain control of your business payroll as well as having more time to concentrate on business growth activities.
One disadvantage of payroll software is that it could be a challenge to get the hang of using it. However, most software providers offer support to help you set up and manage the system.
Steps to do payroll
Now that you are aware of the considerations to factor in for your small business payroll, here are the steps to take to add a new employee to your payroll:
- Obtain your employer identification number (EIN)
Getting an EIN is the first step you need to take before you hire employees. You obtain this number from the IRS. Your EIN will be used to report your employees’ employment information and taxes to state and federal agencies. Some states require different numbers for tax purposes. You should check with your state or locality to determine their requirements.
- Request relevant identification
Your employees should provide state or local identification, which will be used to fill out the necessary forms.
- Ask workers to complete the correct forms
You should already know the difference between independent contractors and employees. You need to file W-2 forms for employees and 1099 forms for independent contractors. Your employees also need to complete a W-4 form for you to be allowed to deduct the correct amount of federal taxes.
- Create a payroll schedule
If your state does not have a mandatory payment period, you need to decide a payroll schedule of weekly, bi-weekly, semi-monthly or monthly.
- Communicate payment and compensation terms
You must communicate the terms of your employees’ compensation, which include time tracking, overtime, leave and deductions. Your terms must be set out in a clear manner so that there is no confusion about how pay is calculated, the tax owed and other aspects that affect the amount of money your employees take home.
- Run payroll
After you have gathered the relevant information from your employees and have set up your payroll software, you are ready to run your payroll and pay your staff.
- Update records
It is critical to maintain accurate payroll related information for every employee, such as tax deductions and social security numbers. You are required by law to keep your employees’ payroll records for up to three years after they have left your employment.
- Payroll taxes
The law requires you to report all of your payroll taxes to the IRS and other appropriate authorities. You need to check with your State Department of Labor for local filing dates.
Using software to manage your small business payroll is one of the most efficient and cost-effective solutions for your business. Your payroll system can only be as accurate as the information that is inputted into it. Integrating your payroll software with your employee scheduling tool helps you to pay your employees for only the hours they work, without having to manually enter their hours. Sign up for a free 30-day trial of Deputy to find out how we can help you to streamline your employee scheduling and your payroll.
The information contained in this article is general in nature and you should consider whether the information is appropriate to your needs. Legal and other matters referred to in this article are of a general nature only and are based on Deputy's interpretation of laws existing at the time and should not be relied on in place of professional advice. Deputy is not responsible for the content of any site owned by a third party that may be linked to this article and no warranty is made by us concerning the suitability, accuracy or timeliness of the content of any site that may be linked to this article. Deputy disclaims all liability (except for any liability which by law cannot be excluded) for any error, inaccuracy, or omission from the information contained in this article and any loss or damage suffered by any person directly or indirectly through relying on this information.