If you’re looking into starting your own business, creating a payroll process can seem pretty daunting. On top of all the other aspects you have to consider, paying your future employees punctually and accurately may not seem like a top priority. However, even if you have just a single employee, setting up an innovative payroll system will allow you stay on top of your legal responsibilities as an employer and prevent your company from incurring penalties from the IRS. That is why I’ve broken down the major actions you will have to take into these five steps:
1. Obtain an Employer Identification Number (EIN)
Securing an EIN is necessary to do before you hire even your first employee. This is necessary to report taxes and other documents to the IRS on behalf of your company and provide information about your employees to state agencies. Additionally, it isn’t uncommon for certain state and local governments require businesses to obtain ID numbers in order to process taxes. You can apply for an EIN online here, or call 1-800-829-4933.
2. Differentiate Between Employees and Independent Contractors
Determining whether you’ve hired employees or independent contractors can be a tricky decision to make, and it can affect how you withhold income taxes, social security, and medicare taxes, and pay unemployment taxes. The IRS relies on the Common Law Test in order to make this decision, but you can also read this blog How to Determine if an Employer-Employee Relationship Exists for further information and an infographic.
3. Employee Paperwork
Each new employee you bring on your team must fill out a number of employment documents, the most of important of which is the Federal Income Tax Withholding Form W-4. This determines how much income tax you will have to withhold from their pay, and is necessary to avoid penalties and fines from the IRS. Having a solid onboarding process can really streamline this, as it aids the employee in making certain tax withholding selections based on their personal lifestyle. More information about Dominion’s onboarding feature can be found here.
4. Set a Pay Period
There are a variety of pay periods that you can set, such as semi-monthly, bi-weekly, and weekly. It’s important to choose a pay period and stick with it, as the IRS requires you to withhold income tax for that time-period, even if the employee does not work the entire time.
5. Choose your Payroll System
Formulating and running a payroll system demands an acute attention to detail and accuracy, so you might want to consider using a Software as a Service (SaaS) to take care of your payroll needs. Many payroll companies, Dominion included, will even report your payroll taxes for you, so you don’t have to worry about fees on those ends. Read our blog 3 Signs You Need Payroll SaaS to see if you’re better off outsourcing your payroll.
Interested in seeing what Dominion can bring to the table for you?