Are you a business owner ready to hire your first employee? Knowing what needs to be done in order to process payroll is important. Here are steps to follow for a proper payroll system set-up:
- Obtain an Employer Identification Number. Before hiring employees, you need an employment identification number (EIN), also known as the Employer Tax ID. It is needed to report taxes and other information on payroll returns. For more information on how to apply, see link.
- Obtain State/Local IDs if Applicable. Most state/local governments require businesses to obtain an employer number in order to remit taxes.
- Independent Contractor or Employee? This classification affects how you withhold/pay income taxes, Social Security and Medicare, and unemployment. It is important to be clear on the distinction between independent contractors and employees.
- Employee Paperwork. New employees must complete the W-4 form in order to properly withhold the correct income tax from their pay. You must also make sure to verify each employee’s legal status by filling out an I-9 form.
- Set a Pay Period. Pay periods are sometimes determined by state law – most favoring at least semi-monthly. The pay period should remain consistent. Determine pay period and pay date and post this information in an easily accessible location for employees to see.
- Carefully Document Your Compensation Terms. Understand when overtime occurs (some states are more strict then federal guidelines so be sure to know the rules). Will you offer vacation or other forms of compensation?
- Choosing a Payroll System. Payroll administration requires consistency and accuracy. Determine how you will process payroll – buying software to process yourself or outsourcing to a payroll provider. Regardless of your decision, you — as the employer — are responsible for making sure reporting and paying of all payroll taxes is complete.
- Record Keeping. Federal and some state laws require that employers keep certain records for specified periods of time. For example, W-4s must be kept on file for all active employees and for three years after employment has ended.
- Reporting Payroll Taxes. There are several payroll tax reports you are required to submit to the appropriate authorities on either a quarterly or annual basis.
You must make sure to report earnings and withholdings of each employee as well as the total tax amounts to the appropriate agencies. Being aware of all that is required will help you be prepared to hire your employee and process payroll and reports timely. If you don’t want to handle this task yourself, contact your CPA or a payroll company for assistance.