Posted on April 11, 2013

An SBA Guide to Setting Up Your Payroll

According to the Small Business Administration (SBA), an organized approach to setting up your payroll system is imperative. Not only can it save you errors, but it can also protect you against IRS penalties, which, according to the SBA, are applied to as many as one out of every three entrepreneurs.

1. Obtain an Employer Identification Number (EIN)
This number is required when reporting employee information to federal or state agencies. An Employer Identification Number can be obtained by contacting the IRS in person, by telephone or applying online.

2. Determine whether you will need state and local IDs
Depending on the state and locality in which you operate your business, you may need to obtain additional tax identification numbers. Refer to the SBA State Guide for instructions on necessary state registrations.

3. Know the difference between an independent contractor and an employee
Correctly identifying an individual as an independent contractor versus an employee is extremely important as it impacts how you will withhold income taxes, Social Security and Medicare taxes and pay your unemployment taxes. Consult with a tax attorney, a business attorney or review this Guide to Hiring Independent Contractors.

4. Take care of employee paperwork
All employees must complete a Federal Income Tax Withholding Form W-4 that provides information allowing you to withhold the correct amount of federal income tax. Depending upon your location, a state withholding form may also be necessary.

5. Decide on your preferred pay period
Your preferred pay period may be weekly, bi-weekly, monthly or bi-monthly; however, the required pay frequency is, in most cases, established by state law. For example, in New York, manual workers must be paid weekly. Texas requires that all non-exempt employees are paid at least twice a month. In that state, exempt employees must be paid at least once a month. Currently, only two states (Alabama and South Carolina) do not mandate specific payday requirements. The IRS requires withholding for each time period even if the employee didn't work for the full duration of that time period.

6. Carefully document employee compensation terms
Decide how you will keep track of employee work hours and how you might pay for time off or overtime. Refer to this guide to wage and hour laws. Determine how health insurance premiums and retirement contributions will be deducted from employee paychecks.

7. Choose a payroll system
Determine whether you plan to do payroll in-house or enlist the services of a payroll provider.

8. Maintain all necessary records
Certain employee records must be maintained for years—even after employment has been terminated. Refer to the SBA’s guidelines for setting up records for withholding taxes as well as its online post ""I Keep Good Records - But How Long Should I Keep Them?"":

9. Report payroll taxes
Payroll taxes must be reported to the IRS either quarterly or once a year, depending upon the business size and number of employees. Most employers who pay wages subject to income tax withholding, social security, and Medicare taxes must file IRS Form 941, Employer's Quarterly Tax Return. If you are a small business and owe less than $1,000 in taxes, file the IRS Form 944, Employer's Annual Federal Tax Return instead of Form 941. Finally, file IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, if you paid wages of $1,500 or more in any calendar quarter. You also must file this form if one or more employees worked for you in any 20 or more different weeks of the year. If confused, seek professional assistance and refer to the IRS's Employer's Tax Guide for additional guidance.

Paycor can help answer many of the questions you may have and guide you through this process. To learn more, get in touch with us today.