Whether you are processing payroll on your own with accounting software or hiring an accountant or payroll service provider, it is important to know the basics of payroll, as it is one of the main responsibilities and foundations for your small business.
When processing payroll manually, you should follow a few basic steps. These steps may differ according to the size of your business in terms of requiring more documentation and procedures.
Below, we will cover these steps as they apply to all business models across the board, excluding independent contractors. If you are just starting to set up your payroll, this blog is for you.
Establish Your EIN
First, you will want to establish your employer identification number as well as your state and local tax IDs. With these numbers, the government can track your business payroll taxes so you can properly meet the requirements.
You can apply for an EIN on the IRS website.
Collect the Employee Tax Information
Second, you should collect all employee tax information through new hire forms, which include a W-4 and I-9, if they are a new employee. Depending on your state, you should be mindful of the state and local forms that need to be filled out as well.
If your business offers benefits, you should have the employee fill out the proper forms for those deductions to be withheld from their paycheck. This can include health insurance, a health savings account, and/or a retirement savings plan.
Set Up a Payroll Schedule
Once you have the employee tax information, and the paperwork is all set, you can now set up the payroll schedule. Of course, you should always choose a payroll schedule that is best for your business, but the four main cycles are: monthly, semimonthly, biweekly, and weekly.
After you have chosen that schedule, you must set up a payroll calendar marking the paydays as well as the process days so your employees can receive their paychecks on time, whether through a paper check or direct deposit. Next, you should mark the quarterly tax dates, holidays, and the annual tax filing date. At the start of every year, you will have to set up this same payroll schedule.
Track the Time Worked
Next, you should calculate the gross pay for your employees by multiplying the number of hours by their hourly rate. Then, if the employee worked overtime, you should calculate that number using the higher overtime rate that coordinates with federal law, which is time and a half.
Issue the Payment
After determining the employee’s deductions and subtracting them from the gross pay, you will now have the net pay that your employee will take home. In your payroll system, you should hold those deductions and then pay them with your payroll taxes each month or quarter.
The most common ways to issue a payment to your employee are through a paper check or direct deposit. However, other approaches can be taken such as a mobile wallet or a prepaid card.
Keep Accurate Payroll Records
Sometimes, an employee can have a dispute about their paycheck, so it is important to keep accurate payroll records. These records will also be crucial for tax and compliance purposes. If the IRS needs documentation, you will want to have year-to-date information, so you can show that proof when the issue arises.
Let Assemblage, LLC Handle Your Payroll
At Assemblage, we can help you with your payroll tasks, such as the setup, processing, journal entries, and reconciliations. We can also help with the payroll deductions for benefit plans, paid and sick time-off tracking, and monitoring retirement plan contributions and limits. We would love to assist with your new hire/termination coordination and manage the employee master file.
Contact us today to get started!