What You Shouldn’t Do For Your Small Business Payroll
As a small business owner, calculating payroll yourself can be challenging and complex. Payroll not only involves paying your employees, but it also requires you to keep up with the latest labor and tax laws. To prevent serious problems when running payroll, you must understand how to set up an accurate payroll system and the things that you shouldn’t do for your small business payroll.
How to Calculate Payroll
To set up payroll for your small business, you will need the following information:
- Employer Identification Number
- State Tax Information
- Employee Information (including pay rate)
- Records Keeping System (reliable storage)
Your first step should be to make sure that your business has an Employer Identification Number (EIN) so that the IRS may identify your business. You will need it to set up payroll, so if you don’t already have one, you can easily apply for one on the IRS website.
Next, you will need to collect all of the necessary information from your employees by having them fill out a W-4 form. This form will give you the filing status and personal allowance for each employee and is essential to processing payroll.
Once you have the relevant information for all of your employees, you will want to choose a payroll schedule. Most businesses choose a biweekly or semi-weekly schedule, but you may also choose a weekly or monthly date, depending on how you want to approach your business’s yearly schedule. Generally, the fewer pay periods, the easier payroll is to complete. Some states require employers to pay their employees according to a certain schedule, though, so be sure to double-check with your state’s labor laws.
The most difficult part of payroll is calculating an employee’s net pay. To do this, you must first calculate gross pay by multiplying the number of hours the employee worked and dividing it by their hourly rate. From there, you will have to calculate each employee’s deductions and allowances, as specified on their W-4. You must also factor in payroll tax and benefits.
Once you’ve calculated what will be withheld from the employee’s gross pay, you must subtract that amount to determine the employee’s net pay. You are then ready to pay your employees and don’t forget to keep records.
What Not to Do When Calculating Payroll
Payroll can be complex, and it’s important to understand what to do and what not to do when dealing with payroll for your small business.
1. Do not delay having new employees fill out a W-4 form. You cannot process payroll for an employee without a signed W-4 form. Failing to provide this form will result in late payments to the employee. Employees must also complete an I-9 form to verify that they are legally allowed to work in the United States.
2. Do not mistake independent contractors for employees, or vice versa. Whether a worker is an independent contractor or an employee impacts their income, how they pay taxes, and what forms are needed. Come tax time, employees receive a W-2, while contractors usually receive a copy of a 1099 form (typically a 1099-NEC form). There are serious penalties for misclassifying employees as contractors.
Furthermore, you want to ensure all employees and contractors receive their payroll records on time come tax season. Do not keep your employees waiting too long for their W-2 forms. If a contractor no longer works for you, remember that you are still responsible to send them a copy of the 1099 form as they need it to do their income tax.
3. Do not fail to retain payroll records. Not only does the IRS require businesses to retain certain records, but it may be helpful for you too. You must retain all records for all actively employed individuals, and certain records must even be retained after an employee is terminated.
4. Do not neglect to find the right payroll technology. If you’re doing payroll for your small business yourself, chances are you are still using the help of some payroll platform or payroll software. However, make sure that you are using software that you understand and is easy to use. Using software that you find confusing will only result in payroll errors, which may cause a delay in paying your employees. Using Excel is a simple way to track hours and expenses and makes the payroll process easier.
5. Do not fail to stay organized. One of the main causes of a payroll error is a lack of organization. Aim to keep accurate and exact records of all of your employees’ hours and pay rates in a spreadsheet to track this information for payroll. You don’t want to be scrambling around for this information when it comes time to do payroll or underpaying employees for hours worked.
6. Do not shy away from seeking professional payroll help. If you’re finding the payroll experience to be overwhelming, you do not have to keep doing it yourself. There are many payroll processing services available to help you do your payroll. It may be worth enlisting the help of a payroll service to do your payroll. An even more reliable option is to hire an accountant. Accountants may be more expensive than a full payroll service, but they are more reliable, and they would also be your employee (or independent contractor).
How to Do Payroll For You Small Business
Doing payroll for your small business may be complex and challenging at times, but it is possible. If you follow the steps, meticulously pay attention to detail, and understand what mistakes to avoid, you are setting yourself up to do your payroll. Doing your payroll can save you costs and ensure that you are involved in every detail of your small business.
Your small business can generate a W-2 form and 1099-NEC form using FormPros to make processing payroll documents a simple annual task, saving you both time and money every tax season.