Writing a check is easy, running payroll is not. If you’re a small business owner about to run payroll for the first time, you might be overwhelmed at the sheer number of rules, laws, requirements, terms, and processes required.
To help you figure out all the basics, we’ve broken it down into a simple step-by-step guide for how to run payroll in a small business on your own. Keep in mind, this is a payroll guide to running a small business is only, and doesn’t include withdrawing any funds for employee benefit packages.
Before you run payroll, gather all the information you need. This should happen well before payday, and only needs to be done once. This pre-payroll information includes:
- Your EIN
- Workers’ compensation coverage
- Your Electronic Federal Tax Payment System (EFTPS) account for paying federal taxes
- Employee Form W-4
- Your state tax accounts, such as state unemployment tax
- Your state’s new hire reporting account
Next you need to make some decisions before you cut the first check. First, determine if each employee is exempt or nonexempt from overtime. (To be exempt, the employee must must earn at least $23,660 per year or $455 per week in salary AND have job duties that are considered exempt, otherwise you must pay them overtime).
Once you have all the information you need, you’re ready to run payroll.
To start, gather and calculate employee hours. You can do this through hand-written time cards, software programs, or a punch-in, punch-out system.
Once you have the hours, calculate earnings based off their hourly rate.
After you calculate gross wages earned, subtract taxes and other deductions. The main payroll taxes you need to know about include:
- Social Security and Medicare taxes
- Federal, state, and local income taxes
- Federal and state unemployment taxes
Because each tax as its own rate and rules, this is the tricky part running payroll in a small business of payroll. Unless you are a tax accountant (or have one on staff), a payroll software program or payroll service that can completely take care of this for you might be beneficial for you.
Double check. This is called “approving payroll”. It’s important you double check the results, even if you use a software system. Don’t skip the double check.
After you approve payroll, you can cut the check, issue, direct deposit or use whatever method you’d like to get the wages to your employee.
Filing Tax Forms: The IRS loves their forms, and payroll is no exception. There are tax forms required for any business running payroll. You can submit these quarterly, monthly or yearly.
For large corporations will full-time accountants on staff, running payroll is no big deal. But if you’re hiring your first few employees and are not a tax expert, this process can be overwhelming.
Payroll software is the most popular option for today’s small and medium-sized businesses, but it requires a monthly fee as well as an extra cost per employee. Instead, a payroll service can take care of the entire process for you, ensuring your employees are taken care of so you can focus on growing your business.