How To Do Small Business Payroll: The Basics Explained

There are 59.9 million small business employees in the United States. These hardworking employees don’t work for free. Their employers must manage a payroll system that ensures each employee receives their paycheck on time and in the right amount.

If you are ready to start hiring employees for your business, it’s time to learn about small business payroll.

Do Small Business Payroll

You Need an Employer Identification Number (EIN)

This unique number identifies your business to the IRS. If you pay employees, you must also pay taxes, so this number is a must for reporting your business information for tax purposes. In addition, depending on the state you live in, you may need to pay both state and federal taxes.

To get an EIN, you apply directly with the IRS. There is an online form you can fill out for the easiest and fastest service.

Employees or Independent Contractors?

There is a significant difference between paying employees and independent contractors when it comes to payroll. With employees, you must pay unemployment taxes, Social Security, and Medicare. Your accounting or payroll system needs to account for this.

Independent contractors don’t have these taken out of their payments. However, you may need to report their payments to the IRS if they cross a specific payment amount threshold.

Have Your Documents in Order

In addition to your company documents, you also need to collect documents from each employee. In the first few days of employment, collect their tax information and how they want to receive their paycheck.

Every employee must complete a W-4 Federal Income Tax Withholding Form. Many companies opt for direct deposit. This is faster, simpler, and more affordable than issuing paper checks.

Choose a Pay Period and Process

How often do you plan to pay your employees? Some states have laws on this, so check before you make your decision. The standard is every two weeks, but some companies pay weekly or once a month.

Don’t forget to think about bonuses or commissions. These are often done less often, such as quarterly or yearly.

Choose a Payroll System

Your first option is to buy payroll software and manage the process yourself. However, this will get more complicated and time-consuming as your business grows and you hire more people. An easier approach is to hire outside payroll services.

Working with an outside company lets you focus on your core business while they focus on your payroll. It’s their job to stay up to date on the latest laws and best practices on how to do payroll. You can also scale up your services with them as you grow your business, resulting in a smoother growth process.

Do Small Business Payroll

Set Up Your Small Business Payroll

Now that you understand the basics, you’re ready to set up your small business payroll system. Start by registering your business with the IRS. Decide on a system and process. Then begin hiring employees and getting their documents set up.

Check out our other business articles for more helpful advice and guidance to making your venture a success.