After you hire your first employees and review basic payroll requirements, you need to figure out how to get them paid. There are three ways to approach payroll processing — do payroll yourself, use a payroll service like ADP Payroll, or hire an accountant. Below, we walk you step by step through what each way entails, as well as which option might be best for your business. Remember, there are many payroll websites and local payroll companies that can vary in price, feature and service quality. This post is for educational purposes only. For specific advice, be sure to consult with a George Saenz of WesTex Custom Payroll of El Paso.
This article discusses Payroll, Bookkeeping & Laws
- how to pay employees
- how to set up direct deposit payroll
- laws relating to paying employees on time
- different types of payroll
- Bookkeeping and Quickbooks help
What Is My Legal Obligation to Pay Employees?
Employers are legally obligated to pay their employees. Most businesses are affected by both state and federal laws regarding pay. These laws set the minimum wage, explain when employees must be paid, establish which employers must pay overtime and which employees are entitled to overtime. With employment laws, you also have to consider that there are limits – for example with contractors you cannot by law tell them how to do their job. This is important for cleaning companies, professional services or another type of direct b2b or b2c type of service. If you have a process in place that you want your helpers to follow, maybe you want them to wear a branded shirt – you need to have them on payroll. No working around that.
How to do Payroll Taxes
Payroll taxes are federal, state and local taxes withheld from an employee’s paycheck by the employer. They include Income Tax, Social Security, and Medicare. In order to properly calculate what your payroll tax should be, you need to know the current tax rates. For example, the Social Security tax for 2016 is 6.2% and the Medicare tax rate is 1.45%. The percentages are determined on a yearly basis.
If you want to know how to process payroll yourself, read below.
- Step 1: Have all employees complete a W-4. …
- Step 2: Find or sign up for Employer Identification Numbers. …
- Step 3: Choose your payroll schedule. …
- Step 4: Calculate and withhold income taxes. …
- Step 5: Pay taxes. …
- Step 6: File tax forms & employee W-2s.
To get started:
Step 1: Have all employees complete a W-4. To get paid, employees need to complete Form W-4 to document their filing status and keep track of personal allowances. The more allowances or dependents workers have, the less payroll taxes are taken out of their paychecks each pay period. Note that for each new employee you hire, you need to file a new hire report.
Step 2: Find or sign up for Employer Identification Numbers. Before you do payroll yourself, make sure you have your Employer Identification Number (EIN) ready. An EIN is kind of like an SSN for your business and is used by the IRS to identify a business entity and anyone else who pays employees. If you don’t have an EIN, you can apply for one here on the IRS site. You may also need to get a state EIN number; check your state’s employer resources for more details.
Step 3: Choose your payroll schedule. After you register for your Employer Identification Numbers, get insured (don’t forget workers’ compensation), and display workplace posters, you need to add three important dates to your calendar: employee pay dates, tax payment due dates, and tax filing deadlines.
Step 4: Calculate and withhold income taxes. When it comes time to pay your employees, you need to determine which federal and state taxes to withhold from your employees’ pay by using the IRS Withholding Calculator and your state’s resource or a reliable paycheck calculator. You must also keep track of both the employee and employer portion of taxes as you go.
Step 5: Pay taxes. When it’s time to pay taxes, you need to submit your federal, state, and local tax deposits, as applicable (usually on a monthly basis).
Step 6: File tax forms & employee W-2s. Finally, be sure to send in your employer federal tax return (usually each quarter) and any state or local returns, as applicable. And last but not least, don’t forget about preparing your annual filings and W-2s at the end of the year.
Note: This is not an exhaustive list of your responsibilities as an employer. For advice specific to your business, be sure to go over federal and state requirements or consult with a professional.
Use a payroll service
Don’t worry if the DIY method is not for you, payroll services make it easier for small business owners to pay their employees and get back to their core business functions. Most payroll services calculate employee pay and taxes automatically and send your payroll taxes and filings to the IRS and your state’s tax department(s) for you. With a full-service provider like Square Payroll, you can even keep track of hours worked, import them directly to your payroll, and pay employees by direct deposit.
Choose a full-service payroll provider. If you’re not sure how to do payroll yourself, use payroll software that reduces the risk of errors or fines. Many payroll processing services, like ADP Payroll, handle your payroll taxes, filings, new hire reporting for you, and allow you to complete payroll online. Sign up takes minutes — so you can quickly start doing your own payroll the same day you sign up.