A Small Business Owner’s Guide for Payroll
By: Jennifer Babcock, CPA & Manager
New business owners face several challenges in the start-up phase and mastering the payroll process can be one of the toughest. It’s no surprise that payroll requires several steps and close attention to detail. If you plan to hire full-time or contract employees, you’ll want to familiarize yourself with legal requirements and plan ahead to avoid pitfalls along the way. Here is a step-by-step guide for setting up and operating your payroll process.
Amend your Master Business Application. You must have a registered business to hire employees in Washington state. Businesses and domestic (household) employers must establish employer accounts to report employee hours and wages. The Employment Security Department and the Department of Labor and Industries will each send you a letter with your account number and rates. To establish or reopen employer accounts, you must file a Business License with Business Licensing Service.
Rely on Technology or Your Accountant. As your business grows, you might find that a do-it-yourself payroll model is too time-consuming. Often, business owners spend much of their time on payroll duties, and by outsourcing this task, you can focus on improving or operating other areas of your business. You can work with a professional accounting firm that can manage your payroll or take advantage of online payroll software.
Select Your Pay Schedule. There are four standard choices when choosing what pay schedule works for you – weekly, bi-weekly, semi-monthly and monthly. Selecting your pay schedule depends on your industry and your business’s cash flow. The fewer pay periods your business has, the easier it is to manage yourself. If your company has weekly or bi-weekly payroll periods, it’s best to seek the assistance of a professional partner. Contact the Washington State Department of Labor and Industries to determine whether your proposed pay period complies with state regulations.
Determine Employee Benefits. Offering retirement plans to employees has certain tax advantages and incentives for employers, and it’s a tactic to hire and retain qualified employees, while helping them save for the future. From qualified retirement plans to sick leave, it’s essential to review which employee benefits are mandatory to provide in your state. In Washington state, employers must honor a minimum of one hour of sick leave for every 40 hours worked.
Establish an EFTPS Account. The Electronic Federal Tax Payment System is a free system offered by the U.S. Department of Treasury to pay your federal taxes. The EFTPS tool is widely used by individuals, businesses, nonprofits and other organizations as a convenient way to make regular tax payments to the Internal Revenue Service (IRS) and is available 365 days a year, 24 hours a day. Consider setting up an EFTPS account to schedule payments in advance to ensure you don’t miss any deadlines.
Determine Deductions, Allowances and Other Withholdings. One of the most critical steps to processing payroll is determining each employee’s deductions and allowances. This refers to how much money is taken out of your employee’s paycheck during the year and is determined based on the information provided on the employee’s W-4 form. For deduction and exemptions, you will need to factor in other areas for payroll processing and withholdings such as federal taxes, Social Security, state taxes, local taxes, Medicare, 401(k) contributions, etc.
Determine Net Pay. You are left with your net or take-home pay after all pre-tax and post-tax deductions are subtracted from your employee’s gross pay. If you are using an electronic delivery method, you need to review specific requirements for your jurisdiction where you have employees. Most states require employers to include pay statements with each payment of wages. There are alternative options to electronic delivery like traditional checks, but most employers find paper and postage increase processing fees with their payroll. Direct deposit is less expensive and typically more convenient.
Remit Taxes. Once you have deducted income, Medicare, and Social Security taxes, you are responsible for making tax payments to the IRS and producing specific reports. There are two deposit schedules – monthly or semiweekly for determining when you deposit Social Security and Medicare taxes and withheld federal income tax. These schedules tell you when a deposit is due after a tax liability arises (for example, when you have a payday). You can follow detailed instructions from the IRS on Deposit Requirements for Employment Taxes.
Prepare Quarterly & Annual Tax Reports. The final step in running your payroll manually is to file the required tax forms with the federal and state government. You will need to complete the IRS Form 941, Employer’s Quarterly Federal Tax Return, which will tell you how much wages you withheld from each of your employee’s paychecks and the amount of employer taxes you paid for that specific quarter. Next, you will need to file IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. You’re required to file Form 940 if you paid at least $1,500 in employee wages during the year or if you had an employee work for 20 or more weeks during the year. And lastly, every employer engaged in a trade or business who pays remuneration, including non-cash payments of $600 or more for the year (all amounts, if any income, Social Security, or Medicare tax was withheld) must file a Form W-2 for each employee.
Payroll takes a lot of data, time and attention to detail. You can quickly eat up a good chunk of time, whether you’re calculating payroll, preparing checks and paystubs, generating reports, or filing payroll-related taxes and returns. And as you know, time is money. Your accountant can take the burden off your shoulders and give you back your most valuable asset – time. Working with a professional who can help you through the steps above when you begin setting up your payroll process is best. Contact us to learn more about our payroll outsourcing services. Contact Cordell, Neher & Company, PLLC today at (509) 663-1661 to learn how we can help you maximize payroll efficiency.
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