Great planning and record keeping skills can increase your business’s efficiency and decrease your legal risk as you process payroll for your employees. For in-house payroll or outsourcing, you have several great options for managing your employee payroll in a cost efficient, effective manner.
1. Make sure you have an Employer Identification Number (EIN). This is how the Internal Revenue Service (IRS) tracks your payments and verifies compliance. You can call the IRS directly to obtain an EIN (800-829-4933).
2. Obtain state or local ID numbers. Some local or state governments require that you have special IDs. In some cases you could be paying not only federal and state tax deductions, but city or municipality tax as well.
3. Payroll System. When you choose your payroll system, whether you plan to do payroll internally or outsource to third party payroll services. Poll other business owners you know and find out what they use. Did they change options at any point? Why?
4. Understand payroll tax law as it applies to your business size or type. No matter what the size of your business, be sure you understand the tax laws and compliance requirements. In all cases, because tax law changes, consult IRS Publication 15 for complete information, and to ensure you remain in compliance.
5. Do you have contractors as well as employees? If so, have you classified them properly? Be sure you understand the differences as Social Security, Medicare, and unemployment taxes are all affected.
6. Plan ahead. Plan ahead for how you want to handle overtime pay, vacation, and retirement contributions and how you’ll deduct them from the payroll. Note that while vacation pay is not legally required, most businesses offer it.
7. Be diligent about your recordkeeping. Obtain a signed W-4 form for all employees. You must keep a copy for three years after the employee leaves or is terminated. Keep copies of all W-2s and filed tax forms. Keep a thorough record of the dates and amounts of all tax deposits you or your accountant make.
8. Outsourcing. If you have been doing your payroll internally and your business is growing, you might be thinking about outsourcing. However, before you get quotes from payroll-processing companies, check with your financial institution. Some banks offer payroll processing services to their business customers as a free courtesy. It might even be worthwhile for you to move your business to another bank if their fees are free or significantly less than the payroll-processing companies available to you.
9. The Affordable Care Act (ACA). This will require you to offer health insurance to all employees as of 2014. However, new decisions may allow you to take a phased or grandfathered approach, so check the latest tax code to be sure of the effective dates for your business. Whether you assist your employees with health insurance premiums or not, they are typically deducted from payroll checks and paid to the appropriate insurance carrier on behalf of the employee.
10. Make all your federal and state payroll tax deposits on time. You can be fined up to 100% of the tax if you do not make these payments in a timely manner. Make sure your accountant or payroll-processing company makes timely deposits.
11. Budget ahead. Remember that you are legally required to match both the Social Security and the Medicare amounts that you withhold from each employee’s pay. This represents 7.65% of the employee’s gross earnings. You must also pay FUTA tax, which is federal unemployment. This is detailed in the Employer Tax Guide provided by the IRS.