Growing your business to the point where you can hire employees is undoubtedly a great accomplishment. It shows that you’re finally earning enough revenue to justify further investments in your products and services. Of course, successfully scaling up your operations requires more than just a capital injection. You need to put systems in place to keep your critical processes running smoothly as they increase in size and complexity.
When it comes to your newly established workforce, an effective payroll system is absolutely necessary.
Why You Need a Payroll System
A recent study from the Rotman School of Management revealed that entrepreneurs who can bring skilled talent to their organization are far more likely to see sustained success with their ventures. If you want to build an experienced team that can push your business to the next level, then you need to compensate every team member fairly, accurately and consistently.
But without a formal payroll system in place, you’re just as likely to end up delaying or miscalculating paychecks as you struggle to account for applicable hourly rates, benefits, overtime, and tax deductions. Over time, these disruptions will significantly impact your staff’s morale and productivity. From a wider perspective, it could hurt your reputation in the job market and make it more difficult for you to recruit high quality candidates.
Another big factor to consider here is compliance. Every registered business is legally obliged to follow a number of local and federal regulations. These laws cover everything from minimum wage and overtime payments to relevant deductions for social security, Medicare, and state unemployment programs. The IRS code will also set out clear rules for how employee payments are classified and reported for tax purposes. Any failure to maintain payroll compliance will open you up to fines, audits, and even lawsuits.
The only way to escape these consequences is by establishing a reliable and legally compliant payroll structure. Although this process can be fairly complicated, these step by step instructions should help you get your system set up as quickly as possible.
Read Up On Labor and Tax Laws
Before you start gathering documentation and filling out forms, you need to understand your payroll and payroll tax responsibilities as an employer. Amongst other issues, you should be aware of:
- Minimum wage requirements for your state and industry
- Rules for overtime payments.
- How to present payroll to your employees.
- How payroll taxes are reported to appropriate agencies.
- State-specific labor laws.
- All applicable payroll taxes including:
- Federal and State Income Withholding Taxes
- FICA Taxes (Social Security and Medicare)
- Federal and State Unemployment Taxes
- State Worker’s Compensation Benefits Programs
Most of this information can be found on the U.S Department of Labor (DOL) website as your state’s own DOL website.
Get Your Employee Identification Number (EIN)
When you report tax information (withholdings, wages paid) to the IRS and other state agencies, your EIN will be used to identify your business. If your business is a partnership or company then this ID number will be required regardless of whether you have any employees or not, as a sole proprietor you can wait until you make your first hire to get an EIN. You can get an EIN by applying directly to the IRS. They will ask you to complete and submit an SS4 form, after which you will receive a 9-digit number.
As part of your EIN registration, you will also be automatically enrolled in to the EFTPS (Electronic Federal Tax Payment System). You can use your EFTPS account to pay payroll, income and excise taxes through the Internet or over the phone. The EFTPS is securely linked to your bank account to allow easy fund transfers.
Register as an Employer in Your State
In some areas you may be required to obtain additional identification numbers for your state and locality. Again, this is for tax processing purposes. Contact your local government officials to find out how to get this number. You should also find out how payroll, income tax and unemployment taxes should be reported and paid in your state.
Buy Worker’s Compensation Insurance
As an employer you will generally be expected to carry worker’s compensation insurance coverage. This fund will cover any medical costs incurred, or income lost, due to injuries sustained on the job. In certain jurisdictions you will be required to purchase coverage directly through the state. In other areas you are allowed to find your own private insurance provider. Insurance rates will vary wildly depending on the nature of your business. If you are working in a high-risk area such as construction or security then you will likely need to pay a far higher fee to cover each employee.
Get Your Employee’s Information
Before you set up your payroll system you will need to gather a variety of information from your employee. This includes:
- The employee’s full name.
- Their social security number.
- Their date of birth.
- Date of hiring.
- Their current place of residence.
- The employee will need to complete a W-4 form before they are eligible for payment. The details on the W-4 Form will determine the employee’s filing status and amount of taxes to be withheld from their paycheck.
- A completed I-9 Form. This document confirms that your new recruit is legally permitted to work in the United States. The I-9 Form will need to be comprehensively verified within three days of hiring.
Report Your New Hire
All new hires must be reported to the local state authority within 20 days of recruitment. This enables the state to accurate enforce a variety of legal processes.
- It allows the state to collect garnishments for child support and other due payments from the employee’s paycheck.
- It allows the state to identify fraudulent unemployment or welfare assistance claims.
If any of these employees leave your business then you must also report this to the relevant agency. Contact your state revenue agency for more information on how to register new employees.
Employee Vs Independent Contractor
Your payroll preparation will be largely dependent on how you classify your workers. If they are considered employees then you must withhold, deposit, report and pay a variety of taxes on behalf of your employees including: employee income taxes, unemployment taxes, social security taxes and Medicare taxes. By contrast, an independent contractor is considered to be separate from your business. These individuals will report and file their own income taxes and they will not be eligible for any of the same benefits as employees.
This determination is usually made based on the degree of control you exert over the worker, how they are compensated for work performed, and the relationship between the employer and the worker. If you misclassify an employee as an independent contractor then the IRS may well come after your business for any taxes owed.
Exempt Vs Non-Exempt
Another issue that you must address before payroll processing is whether to classify your employees as exempt or non-exempt. Non-exempt employees must be paid at least minimum wage, and they are entitled to overtime payment at one and a half times their normal pay for any work performed over the prescribed 40-hour work week. These employees are usually blue collar workers who are paid on an hourly basis. On the other hand, exempt employees are not held to the same standards. Exempt employees are usually white collar workers in service industries who are paid a bi-weekly or monthly salary instead of an hourly wage.
Decide on The Pay Period
How often are you planning on paying your employees? In the US you can choose to pay workers on a weekly, bi-weekly, monthly, or bi-monthly basis. However, your state may have particular rules on how frequently you can run payroll, so make sure that you’re aware of payroll regulations in your state. There are number of considerations to take into account when deciding your payroll period:
- A shorter payroll period will incur higher payroll processing costs.
- When do your employees prefer to be paid?
- How difficult will it be to calculate overtime payments and benefits on your payroll schedule?
- Do pay periods fall on the same date every month?
- Which payroll period is more suitable for salaried employees, which is preferable for hourly workers? Do you have the capability to run separate payrolls?
Document Employee Compensation
When planning your payroll you need to have a firm idea of how you plan to track employee compensation. Will you use time and attendance software to ensure that you have a clear record of hours worked? How will you account for overtime payments for both hourly and salaried workers (if applicable)? Will OT be paid alongside regular wages, or will it be paid on an accruals basis?
You should also consider whether you plan to introduce any optional employee benefits or incentives. If you offer retirement schemes such as a 401k or pension plan then you must ensure that your payroll is set up to make the appropriate deductions and contributions for each employee.
How Will You Pay Employees?
One final consideration to take into account before your payroll system goes live is how you plan on paying your employees.
- Will you print and manually distribute paychecks to each employee? This may be a preferable option if many of your workers do not have pre-existing bank accounts. This option will require special supplies and it may take a considerable amount of time to prepare and process each check.
- If you get your employees bank account and routing information upon hiring then you can simply deposit wages in their bank account at the end of every payroll period. This is a quicker and more hassle-free method of payment.
Who Will Administer Your Payroll System?
The average business owner spends anywhere from 1-10 hours on payroll every month. The cost of in-house payroll can vary similarly from $50 to $5,000 a month depending on the size of the workforce in question. In an increasingly complex legal landscape, every growing business should give careful thought to how they want to manage their payroll. Will you trust the process to a non-specialist employee? Are you going to hire a bookkeeper for your business? Will you try and take on the burden yourself with the help of some accounting software?
If you feel overwhelmed by the long list of requirements for an effective payroll system then you can trust this process to a specialist payroll provider instead. At Sharp Payroll Services we offer a comprehensive range of services to clients across New Jersey. We can help you:
- Set up a suitable payroll period.
- Track hourly wages, overtime and benefits.
- Calculate, report, and file applicable payroll taxes with the IRS.
- Take care of payroll processing and distribution.
- Update your payroll processes to stay compliant current legal and tax regulations.
Have More Questions?
We’re always ready to talk. Get in touch with us online via our contact form, or call us at (732) 458-3800 to get $100 off on your payroll services. If you’re unsure about our service rates, check out the comprehensive breakdown on our site, or reach out to us directly for a quote.