In this article, we’ll go over what payroll is, how it works, and the various forms and documentation involved in the process. Let this be your guide to payroll for small businesses.
Starting a small business often entails many duties that one may not think of initially. From hiring and training employees to running the day-to-day operations of running the business, your time will inevitably be consumed.
Unsurprisingly, payroll is one of the most cumbersome (and loathed) aspects of being a business owner.
Definitionally, payroll is a list of a company’s employees and the amount of money they are to be paid.
As we know, in order to run an efficient business, employees must be paid accurately, and on time.
Now that we have established a basic understanding of what payroll is, it’s time to learn exactly how to set up your payroll.
Firstly, prepare your Employer Identification Number. This is your unique identifier when filing your taxes to the IRS. Depending on the state you’re located in, you may need a local Id as well.
Secondly, ensure you correctly categorize your team members, whether they are freelancers, independent contractors, or full-time employees. These distinct categorizations carry tax implications as well.
Thirdly, prepare the two required forms:
This form must be completed so that your employer can withhold the correct federal income tax from your pay. Consider completing a new Form W-4 each year and when your personal or financial situation changes.
This form is required for all U.S. employers to verify the employment eligibility and identity of each employee hired to work in the U.S. (including U.S. citizens). Employers must have a record of this for each employee.
Once you have officially set up your payroll there are some annual forms you must complete to follow the regulations of small businesses.
Form 941 (Quarterly)
Report federal income, Social Security, and Medicare taxes as well as employee wages
Form 944 (Annual)
Report federal income, Social Security, and Medicare taxes on an annual basis
Form 940 (Annual)
Report federal unemployment tax
Form W-2 and W-3 (Annually)
Form W-2 is what you give to each employee, as well as federal and state governments.
Form W-3 is the transmittal form for Form W-2, which summarizes all of the employees’ Forms W-2 information.
All of this can become overwhelming to manage. Most small businesses decide to outsource their payroll to focus on the growth of the business while the payroll experts do what they’re experts at.
If you’re interested in outsourcing your payroll, sign up for a free consultation and let us do the rest.