You want to make sure all your employees are paid correctly and on time. It's one of your major responsibilities as a small-business owner. If you have a small team, doing your own payroll can save money. Handling payroll management yourself isn't easy but can save you the cost of hiring an accountant or a third-party payroll processing service. If you don't mind taking care of the paperwork, you can manage your own payroll using these steps. Be sure you seek professional advice to determine if these are the correct actions for you.
What you need to do your own payroll
Doing your own payroll involves mostly paperwork, which can be handled either with forms or digitally using payroll software. For each pay period, you must fill out and file the correct forms. Otherwise, you may face legal exposure, litigation costs or have to pay late fees and penalties imposed by the government. Here's where to begin:
1. Get an Employer Identification Number
If you plan to hire employees, you need an EIN for your business. Also known as a Federal Tax ID number, your unique EIN identifies your business with the IRS. If you don't have one, you will need to apply for one through the IRS before doing payroll yourself.
2. Have every employee fill out a W-4 form
Every employee fills out a federal W-4 form when they start a new job. They use it to report their filing status and any personal allowances. You'll use those elections to calculate how much to deduct in payroll taxes from each check. For state and local taxes, states and counties have similar forms for employees in those areas. Check with the revenue departments in those jurisdictions to find the right forms and filing dates.
3. Decide on your payroll schedule
How often will you pay your employees? Set up and communicate payroll calendars for both salaried and hourly employees with key dates: employee paydays, tax due dates and deadlines for filing tax forms.
The IRS website maintains a helpful list of key employment tax reporting and deposit due dates, and individual state revenue department sites list their respective tax due dates and wage payment laws detailing how often and when employees must be paid, with legal and financial consequences for failure to comply.
4. Calculate gross pay and federal and state taxes
You'll need to do some calculations for each employee to determine what to pay them and what to withhold for payroll tax purposes.
- Calculate how much gross pay you owe each employee. For salaried employees, this is the amount of salary they receive on a biweekly (every two weeks), monthly or semi-monthly (twice a month) basis. For hourly employees, it’s a little different. Hours are calculated based on the hours they clock in and out of work or from timesheets they submit with total hours worked. For these employees, there is one rate for regular hours and a separate rate for overtime, which can vary by state. California, for example, requires overtime pay for a certain number of hours per week and sometimes per day.
- Calculate withholding. The IRS makes an online Tax Withholding Assistant available in the form of an Excel spreadsheet so you can easily calculate the correct amount of payroll withholdings, as well as withholding for benefit premiums. You will likely withhold the same amount each pay period for salaried employees, but you may have to calculate this each pay period for your hourly employees. You'll also need to contact any state and local revenue departments for information on their withholding rates.
- Other deductions. Sometimes benefit deductions like medical and dental can be paid either pre-tax or post-tax. The way they are paid will affect the taxable wage base. Another consideration is paid time off (PTO), such as paid vacation or sick time. Depending on their location, paid sick time is required for many companies.
- Write paychecks or send the amount due via direct deposit. Whether you offer direct deposit may depend on the preferences of you and your employees, as well as state laws. If you do offer direct deposit, it can be set up easily with your bank.
- Total all your payroll taxes. If you keep track of payroll taxes for each pay period, it can make paying federal and state taxes and filing documents much easier. These payroll taxes include what you deducted from your employees' pay for Social Security and Medicare, the employer portion of the taxes owed for Social Security and Medicare and your income taxes withheld, as well as any withholdings for benefit premiums, retirement funds and garnishments if needed. You will also need to make payments for federal unemployment tax.
5. Never miss paying payroll taxes
It's important to pay your payroll taxes on time. They're due to the IRS either monthly or quarterly, depending on your business. Federal and state tax agencies charge fees and penalties when taxes aren't paid on time.
6. File the right forms
Every quarter, you'll need to file a federal payroll tax return. You'll also have an annual return to file. At the end of each tax year, you'll need to prepare W-2 forms for each employee so that they can file their income taxes.
Remember that independent contractors are different from employees. If you have contractors you pay regularly, it is a good time to make sure you are following all the rules. It's important to ensure that legally you are not treating contractors like employees. Otherwise, you'll need to fill out the necessary paperwork and withhold income and payroll taxes from their checks.
Common payroll mistakes to avoid
Here are some best practices to avoid common payroll mistakes:
- Make sure to set reminders. You wear a lot of hats as a business owner. When you're prioritizing what must be done and what can wait, put payroll and payroll taxes at the top of your must-be-done list. Setting plenty of reminders in your calendar can help you stay on track and avoid paying fines or penalties with the IRS.
- Hire an accountant or small-business payroll expert. Even though you've decided to take on payroll yourself, hiring a professional to help set up the process can reduce your risks. Common errors, such as filing the incorrect amount of withholding, are less likely when a professional has vetted your process. Then, you can be the one in charge on an ongoing basis.
- Keep excellent records. With good recordkeeping, you'll be able to track any issues and address them more quickly. Most states require that you keep some records for three years, but you should keep detailed information for your own purposes as well.
Your bank can help you keep your accounts organized to help you manage payroll. Speak with a business banker and learn more about the resources available to you, including business banking and merchant services. Be sure you seek professional advice to determine if these are the correct actions for you.
For informational/educational purposes only: The views expressed in this article may differ from those of other employees and departments of JPMorgan Chase & Co. Views and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendation for any individual. Information has been obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. You should carefully consider your needs and objectives before making any decisions and consult the appropriate professional(s). Outlooks and past performance are not guarantees of future results.
This article is not intended, directly or indirectly, to provide legal or tax advice. If you have questions about what might be legally required by federal or state law, you should consult an attorney and/or tax expert.
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