Managing payroll involves more than signing the occasional check for anyone who helps run your business. You must ensure you always have enough money to pay your employees, maintain accurate records and stay in the government’s good graces.
Large companies often have an accounting team that handles payroll, but that isn’t an option for every business owner. Even if you hire help for payroll-related tasks, what happens if your payroll expert gets sick or goes on vacation? It’s important to know how to handle these financial functions, even if you don’t expect to do them regularly. Make sure you master the payroll essentials below so your team gets paid on time, every time.
The Basics of Paying Employees
It’s beneficial to learn everything you can about payroll, but you can issue paychecks without extensive knowledge of the payroll process. From creating an EIN to filing federal tax forms, here are four basic things you should know how to do before you hire paid employees.
1. Request an Employee Identification Number
An employee identification number (EIN) is basically the equivalent of a Social Security number for business owners. You need your EIN when you file a business tax return. Companies that issue small business loans or credit cards may also request your EIN, and you may need one when setting up a business bank account.
You can request an EIN from the IRS. Applications are available Monday through Friday from 7 a.m. to 10 p.m. EST. There is no charge for an EIN, and you can request one per day.
2. Make Sure Employees Complete a W-4 Form
You can’t pay employees until they complete a W-4, a tax form that tells you how much money to deduct from each paycheck. This money is withheld for federal taxes and based on marital status and the number of dependents a worker claims. Employees can also itemize deductions on the W-4 form.
The IRS needs a new W-4 whenever an employee’s situation changes. For example, an employee who welcomes a new child to the family or divorces their spouse should complete a W-4 form. Workers may also ask for annual W-4 updates if they take turns claiming a dependent at tax time with the child’s other parent.
After employees complete their W-4 forms, you can use the IRS withholding calculator for payroll calculations. This calculator can give you a better understanding of how much you should deduct from each paycheck. Remember, every employee has a different withholding situation, so don’t adopt a one-size-fits-all formula for federal tax deductions.
3. Establish a Payroll Schedule
Nobody likes guessing when they’ll get paid, so make sure you have a specific schedule in place for payroll. Some businesses pay on a set date each month, such as the 15th or 30th. Others prefer to issue payments on a particular day of the week, such as Tuesday or Friday. No matter which you choose, make sure it’s consistent.
Your company’s budget should influence the payroll schedule. Think about when you typically send and receive payments then determine an estimate for each employee’s weekly income. Make sure to plan for unexpected expenses, like if an employee racks up overtime while other workers are on sick leave or sales are booming.
4. Review Income Guidelines
When you hire independent contractors, you can pay a flat rate for projects. That’s not true for employees, so make sure you classify workers correctly and pay the appropriate amount. Keep up with federal minimum wage and state minimum wage requirements, and don’t forget about overtime laws.
Some areas calculate overtime per week if workers exceed a set amount, such as 40 hours. Other states must pay daily overtime rates if employees work more than eight or nine hours per day. You may also have to provide employees with paid breaks, depending on the state where your business is located.
What You Should Know About Payroll and Taxes
As a business owner, you may be wondering — how can you make it easier on yourself when it’s time to do your taxes? Are there any payroll practices you should set up from the start?
Tax laws and guidelines are different in every state, but federal guidelines are fairly consistent. It would be best to familiarize yourself with federal tax requirements, but don’t forget about local taxes.
Here are some expenses that may require withholding:
- State taxes
- Local taxes
- Federal taxes
- Medicare taxes
- Social Security taxes
Keep in mind that taxes aren’t the only reason why employees may need funds withheld. Some employees also have their wages garnished for child support, alimony or other court-ordered withholdings. These court-ordered garnishments may include unpaid student loans, legal expenses or credit card debts.
When you receive a request for wage garnishment, don’t ignore it. Generally, employers have a specific timeline to respond to legal documents for garnishments. This timeline may be outlined on any legal documents you receive, but if you don’t see it, contact an attorney or your local courthouse for guidance. Failing to respond in time may result in costly fees or other legal actions against your business.
You may also need to deduct funds for employee benefits. These benefits may include health insurance, 401K plans, FSA or HSA programs or life insurance.
Create a Tax Payment Schedule
There are many taxes that businesses must pay. It’s your job to submit federal, state and local taxes for your employees, but your business itself must also pay taxes. Keep your payments organized by establishing a payment schedule for all the taxes that are your company’s responsibility.
The IRS accepts virtual payments online, but you can also mail in payments for your business and its employees. You must keep all employee tax payments in a separate financial account known as a trust if you plan to hold on to them for a bit. Legally, you are not allowed to spend your employees’ taxes on other business expenses.
When you create a tax payment schedule, determine whether you will submit payments quarterly or annually. The IRS and your local taxation agency can help you determine the right payment schedule for your business. Make sure you keep up with your tax payments, as late payment fees can rack up quickly. The IRS and your state’s taxation agency may also charge interest on late payments.
Keep Detailed Records
Don’t just send money to the IRS and forget about it. Ensure you maintain accurate records each time you make a transaction, whether you’re paying a worker or a government agency. Otherwise, you’re in for a mess if your company ever gets audited.
Depending on the nature of your business, your records may contain the following:
- Gross and net pay for each employee
- Pay history for independent contractors, freelance workers and gig workers
- Receipts for all business-related purchases, such as equipment or office furniture
- Receipts for all incoming and outgoing payments
- Employee W-4 forms
- Information about employees who have been terminated or are on leave
- Revenue logs
- Budget sheets
- Profit and loss statements
You may also want to keep notes about unexpected surges or drops in revenue. These records may help the IRS better understand your situation if your company’s revenue drastically changes.
Should Your Business Use Payment Software?
Businesses often rely on payment software for payroll and other accounting tasks. Sure, you can still calculate totals by hand if you prefer, but that’s not ideal. Calculating expenses on your own leaves too much room for error.
It’s important to pay your employees the correct amounts — not just for taxation purposes, but because it establishes trust. Many workers will not respect your company if you consistently pay them late or issue checks for the wrong amounts. That’s why many business owners trust the automated process of a quality payroll software program.
When you search for payment software, consider whether you need a program exclusively for payroll or a payment processing program in general. Gusto is a popular program for business owners, but you may prefer a different program. Consider ADP if you have a large business, and check out OnPay if you have a small business.
QuickBooks Payroll works well if you need a basic program that’s easy to use. Payroll4Free is an option if you need free payroll software for your business. Other payroll software options for businesses include Workful, Paychex Flex and Rippling.
Securing Capital for Employee Payroll
“Ugh, labor is too high.”
Restaurant employees often hear that phrase right before they’re sent home early. Some retail workers are also familiar with the dreaded labor cuts. In situations like this, the number of employees on the clock is higher than the demand for goods or services. Managers often cut hours or send employees on break to rectify this issue, but what happens if nobody goes home?
At some point, you may find that your business is short on funds for payroll. Fortunately, Lendzi can help if that happens. We can connect you with lenders for small business loans, business lines of credit and business credit cards. You may also find it helpful to consider equipment financing or invoice factoring if funds are tight.
If you’re worried you can’t pay your employees, reach out right away. Don’t bail on payroll completely or issue checks that may bounce. We’ll help you figure out a solution.
What Happens If the Federal Minimum Wage Increases?
Whenever a new political leader enters the office, there are talks about increasing the minimum wage. Employees may be excited about a potential raise increase, but many business owners panic at the thought of minimum wages going up. It’s not that they don’t want to pay their employees more money — it’s just that they can’t afford it.
Sound familiar? Keep in mind that the government won’t implement any approved changes immediately, so you still have some time to compare funding sources. Lendzi can help you secure the capital you need for payroll, whether you need more money now or just want to plan for the future.
Lendzi Understands the Payroll Struggles Business Owners Face
Employees are the backbone of your business, so it’s vital that you pay them for their efforts. That may sound good in theory, but the reality is that many businesses struggle with payroll-related tasks. Connect with Lendzi if you need assistance with payroll or other accounting functions, regardless of your company’s size, industry or revenue.
Lendzi has solutions for every business, whether you need help applying for a small business credit card or exploring business banking options. We can also answer questions about commercial mortgages, merchant cash advances, debt consolidation and more. Our team looks forward to helping you manage your financial decisions.