You have a small business and are now in a position where you have on-boarded your first employee. Congratulations! This means that even though it is manageable because it is only you and your partner now, you must do payroll correctly. Payroll may entice you as a difficult element in your company but if you ensure that you get the fundamentals correct at the onset, you will not have problems later. Here's what you need to know about payroll for your one-person organization:
Here's what you need to know about payroll for your one-person organization:
1. Open Company Payroll Accounts and Establish Payroll Processing Systems
However, to process your employee’s wages for their first payday, you must have your payroll accounts and system in place. Here's what you need:
- Business Number – Obtain this unique number from the IRS to use as your business identification. You will need it to prepare taxes, for example, to understand the profit and loss statement and determine the amount of taxes to be paid.
- This is a list of some of the most common administrative solutions for very small businesses: Payroll software - There exist many simple software programs that can calculate taxes and deductions and then issue checks. There are two leading options here: Gusto and Quickbooks Payroll.
- For the payroll program, open a separate bank account in which all the transactions will be done concerning the payroll program and not mixed with the other business-related accounts.
2. Collect Necessary Paperwork
Once you're ready to run that first payroll, you'll need some info from your new employee: Once you're ready to run that first payroll, you'll need some info from your new employee:
• Federal Withholding Tax Form W-4 - This is used to provide information regarding the federal income tax withholding, filing status, dependents, and many other things that affect the payroll tax.
• Federal withholding form - If you are an employee and/or a dependent, your employer will complete this form to determine how much federal income tax will be withheld from your pay.
• Direct deposit info (if offered) – If you offer direct deposit as one of the options, your employee will have to complete a form that includes banking information. Another method is paycards which may suit employees who do not have their bank accounts.
3. Compute pay and Tax deductions
More than the basic pay, what do you actually remunerate your employee? Here are the steps:
i. Gross wages that depend on the salary or hourly wage given to the employees.
ii. Federal income tax, Social Security tax and Medicare tax - Determine the amounts to withhold this according to the W-4 and IRS laws. This depends on the Payroll system you have.
iii. State/local taxes - Deduct any amount which is applicable for state and/or local taxes.
iv. Optional deductions - You may include such deductions as for health insurance premiums where an employee chooses to have a certain amount deducted from his/her check, retirement plan contributions, etc.
v. Net pay – The wages or salary that is earned by an employee less all deductions including taxes.
4. Pay and File Taxes
You'll need to take a few more steps to finish up the payroll process:
• Compensation – Cash your employees – Provide checks or direct deposit pay. Do not forget any reimbursable expenses.
• Make payroll tax deposits – At any necessary time or as prescribed by the law, remit to the IRS and state collecting agencies the amounts of taxes that you have deducted from your employees’ paychecks.
• Quarterly and annual payroll tax returns – After each quarter, you will need to file Form 941 for federal and state payroll reports. But at the end of the fiscal year, you are supposed to forward Form W-2 and W-3 to your employees.
Although, it can be overwhelming at first, after mastering the basics and using the correct payroll software for your small business, payroll for one or two employees is fairly easy to administer. You have the biggest component of establishing your business already solved for you – your people!
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