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The steps to set up payroll for a new business need to be done correctly or it could lead to major problems down the line.
Starting a new business is an exciting venture, but it comes with a myriad of responsibilities, one of which is setting up payroll. Managing payroll effectively ensures your employees are paid accurately and on time, helps maintain compliance with tax regulations, and keeps your business operations running smoothly.
Obtain an Employer Identification Number (EIN)
The first step in setting up payroll is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The EIN is a unique number that identifies your business for tax purposes. You can apply for an EIN online through the IRS website, and it’s free of charge.
Register for State and Local Tax IDs
In addition to a federal EIN, you may need to register for state and local tax identification numbers. These are required for state income tax withholding, unemployment insurance, and other state-specific taxes. Check with your state’s Department of Revenue or equivalent agency for specific requirements.
Classify Your Employees
Properly classifying your workers as either employees or independent contractors is crucial. Employees are subject to tax withholding, while independent contractors are responsible for their own taxes. Misclassification can lead to penalties and back taxes.
Set Up a Payroll System
You have several options for setting up a payroll system:
- Manual Payroll: Suitable for very small businesses but can be time-consuming and prone to errors.
- Payroll Software: Automates calculations, tax withholdings, and filings. It’s ideal for growing businesses.
- Outsourcing Payroll: Hiring a payroll service provider can save time and reduce errors but comes with added costs.
Choose the system that best fits your business size and budget.
Collect Employee Information
Gather essential information from your employees, including:
- W-4 form (Employee’s Withholding Certificate)
- I-9 form (Employment Eligibility Verification)
- Direct deposit information (if applicable)
Ensure all forms are accurately filled out and securely stored.
Determine Pay Periods
Decide on a pay schedule that works for your business, such as weekly, bi-weekly, semi-monthly, or monthly. Consistency is key to maintaining employee trust and managing cash flow effectively.
Calculate Payroll Taxes
Payroll taxes include federal income tax, Social Security and Medicare taxes (FICA), and state and local taxes. Stay informed about the current tax rates and regulations to ensure accurate withholdings. Payroll software can simplify this process.
File and Pay Taxes
As an employer, you’re responsible for filing payroll tax returns and making payments on time. Federal tax payments can be made through the Electronic Federal Tax Payment System (EFTPS). State and local tax filing requirements vary, so consult with your state’s tax agency.
Keep Accurate Records
Maintain detailed records of all payroll transactions, including employee hours worked, wages paid, tax withholdings, and tax filings. This is important for tax purposes and in case of an audit.
Stay Updated on Compliance
Tax laws and regulations can change, so staying informed is critical. Regularly review updates from the IRS and your state’s tax agency, or consider working with a tax professional to ensure compliance.
Trust the Professionals at the Harding Group
Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for consultations and strive for open communication with our clients.
Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning? We have the necessary expertise and years of proven results to help.
We gladly serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time, contact us online or give us a call at (410) 573-9991 for a free consultation. Follow us on Facebook, Twitter, YouTube, and LinkedIn for more tax tips.