Small Business Payroll

Managing payroll effectively requires a comprehensive system that is capable of handling the myriad of legal and tax issues associated with processing payroll.

Small business payroll can hum along happily like a finely tuned engine that requires an occasional tune-up, such as updating tax rates and software, or it can operate in perpetual crisis-mode that subjects the employer to tax notices, legal issues, and unwanted communications with the IRS and other governmental regulators.

The difference is in maintaining a comprehensive payroll system that covers all of the legal and tax requirements stemming from processing a payroll check.

The easiest solution is to simply outsource payroll. This allows the company to ensure timely payments, proper tax filing and deposits in various jurisdictions, and to maintain adequate recordkeeping. This is especially true when employees are working in multiple states or localities that trigger various tax filing obligations.

Payroll Companies and Small Business Payroll Services

The largest payroll companies are ADP, Ceridian, and Paychex. Each handles large payroll functions and tax filing. For smaller companies, small business payroll software includes a complete set of small business payroll services. For example, QuickBooks, PeachTree, and AccountEdge (MYOB) offer complete and cost-effective small business payroll services for both processing payroll and for filing payroll taxes.

Enterprise level or small business payroll services can handle the entire payroll process for you. When the business submits employee hours, the payroll companies can handle deductions, benefits, retirement programs, direct deposits, in addition to computing, depositing, and filing local, state, and federal payroll taxes. At the end of the year, the payroll service will also generate W-2’s for employees and local, state, and federal governments, and file annual payroll tax returns.

Some companies elect to process payroll internally, while outsourcing only the payroll tax service. Whatever you choose to outsource, payroll companies offer a complete menu of services, from managing the check processing, to payroll tax to outsourcing the entire payroll.

The cost of outsourcing payroll and payroll tax filing can be well worth the benefits of maintaining proper records, fulfilling payroll and tax requirements, and preventing costly penalties for nonfiling or late deposits.

Regardless of how you decide to manage your payroll, there are several issues employers should be aware of when hiring employees. The below sections cover the main issues employers should be aware of when managing enterprise, medium-sized, or small business payroll, and the steps required to properly set up payroll.

Small Business Payroll and the IRS Employee Handbook

Every employer should have the latest version of Circular E employer’s federal tax guide and employee handbook available at the IRS website to review federal withholding, deposit, and reporting requirements.

Small Business Payroll Steps for Setup

1. Whenever you hire an employee, you are required to have an EIN (employer identification number). The employer identification number is a nine – digit number that provides a federal account number for your employer federal tax payments. To get an EIN, fill out form SS-4 that only takes a few minutes and mail, fax, or e-mail it to the IRS.

2. When you hire an employee, you must provide the employee with a W-4 and an I-9 form. The W-4 form must be filled out and signed by the employee for federal withholding requirements. The objective of the W-4 is to withhold an amount equal to what the employee will owe by the end of the year.

The I-9 form is used to verify that the employee is authorized to work in the U.S. Employers must retain completed form I-9s for three years after the date of hire or one year after the date employment ends, whichever is later.

3. Notify the state where you have employees of your business activities. The state will request your federal EIN and will either use it as a separate state account number or assign you a new account number. The state account number is used for reporting any wages and withholding from your employees’ paychecks.  The department for state withholding is the Department of Revenue. Some states will also require their own version of the W-4 to be filled out, which you should keep on file with the W-4. Other states use the federal W-4 for state withholding purposes, unless the employee requests a different amount to be withheld for state purposes.

4. All of the authorization and tax forms must be on file in a personnel file at the employer’s place of business. When authorizing employees to work, the authorization to set up a new employee should be managed by a separate department such as Human Resources. The separation of authorizing and paying employees is an important internal control that prevents unauthorized checks and payments by creating “phantom” employees.

5. Apply for an account number with the Department of Labor in each state where an employee works. The Department of Labor manages the tax filing for state unemployment insurance payments. The State Department of Labor requires companies to pay unemployment tax payments each quarter for employees working in the state. The account number to pay state unemployment insurance with the Department of Labor is different than the state number for withholding purposes.

For federal and state deposit requirements, click the small business payroll tax section.

Small Business Payroll Tax

Payroll Accounting

Independent Contractor vs. Employee

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