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Updated: Oct 1, 2019
If your small business has employees, you know that you need to pay them accurately and on time, or risk dealing with issues such as angry employees and hefty government fines. While some small business owners choose to hire an accountant or bookkeeper, and others opt for payroll software, DIY payroll is possible with the right information and planning. Here’s what you need to know to manage your own payroll.
An Employer Identification Number (EIN) is going to be the first thing you’ll want to obtain before processing payroll. An EIN is used to identify a business entity to the IRS. Think of an EIN as a Social Security number. To get an EIN, you apply with the IRS either online (preferred method), or by fax, mail, or phone. Overall, the process is simple and at no cost to you. 3
Your employees will need to fill out Form W-4 to document allowances and filing status. For payroll, you need Form W-4 for all of your employees. This way, you know exactly how much federal income tax to withhold from each paycheck. Otherwise, you may have to pay a penalty.
Employees are not “one size fits all” when it comes to payroll, and you can’t stop at just part-time or full-time. Your employees will either be considered exempt or non-exempt. Proper classification is crucial to payroll accuracy because both groups have different rules. Typically non-exempt employees are hourly employees who are eligible for overtime, whereas exempt employees are salaried employees who do not qualify for overtime. These classifications are important because if you have a non-exempt employee who works overtime, and you don’t account for that, you’ll have to pay them back in missed wages at a later date.
There are four payroll schedules: weekly, bi-weekly, semi-monthly, and monthly. While there are pros and cons to each method, you may not always get the choice to choose the payroll schedule you’d like for your business. It’s important to check your state requirements because there may be rules in place for which schedule you need to follow. Bi-weekly and semi-monthly are the most common methods, and provide a consistent schedule.. Weekly tends to result in more time spent on payroll, while monthly will give you the most time away from this task.
We touched on this with Form W-4, but a big part of payroll for small business owners is ensuring that you are calculating and withholding taxes. Another example of something you may encounter while withholding is wage garnishments. These are wages you have to hold from an employee’s paycheck due to debts such as child support, defaulted student loans, or other consumer debt. You will also be responsible for withholding federal (as well as state and local if applicable) payroll taxes from your employee’s paycheck. This is why it’s extremely important to make sure you’re staying on top of the recent laws and regulations to ensure you are compliant.
Filing personal income taxes in April may get the most hype. But as a small business owner, you may be required to pay taxes at various times throughout the year. Depending on the type of legal business structure you have, there will be different tax due dates you’ll have to stay on top of throughout the year. Neglecting to pay on time can lead to hefty fees and penalties, which no small business owner wants to deal with.
While small business payroll is a lot of work, with the right planning, you can manage your own payroll. Besides the steps mentioned above, the biggest thing you’ll have to commit to is setting aside the proper time for processing, as well as dedicating time to research and local, state, and federal tax changes. Tax laws can change frequently, and you may not always be aware. Staying up-to-date will help you stay compliant with the government, and keep your employees happy with accurate paychecks.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.