As a small business owner, you know hiring your first employee is a major step in the growth of the business. It means your small business is more established, and the future appears bright with high hopes for growth and prosperity.
When you bring on an employee, your business is required to withhold and deposit payroll taxes and file employee payroll reports on a regular basis. These employee payroll tasks do not contribute to the bottom line but are required by federal and state law to be done correctly.
One option for your small business is to outsource the tasks to a business payroll service vendor. A full service payroll company will calculate and issue paychecks, make tax deposits, and file payroll returns as required. Now your small business is free from the headache of employee payroll management, but the service often comes with a high price. It could cost hundreds or even thousands of dollars per year for just one or more employees.
Another option is to use local CPAs or bookkeepers. They can provide a more personalized small business payroll service but it will not be cheap either. Many good CPAs do not even want to do small business payroll services because it is tedious.
However, if you are looking to save some money, many small businesses are doing it themselves. All you need is a basic understanding of the payroll requirements, process, and an easy do-it-yourself payroll management tool such as Paycheck Manager. Paycheck Manager helps to calculate and issue paychecks, make tax deposits, and file payroll forms that are needed to meet state and federal employee payroll requirements. It is the most economical and generally convenient way to manage employee payroll, though some basic knowledge of payroll is needed. Paycheck Manager offers several payroll software and service combinations for companies to choose the level of payroll services as needed.
No matter which way you choose to manage your small business payroll, knowledge is power. A good understanding of payroll will help choose the best payroll management service or tool that meets your payroll needs.
Seven Steps to Successfully Bringing on Your First Employee:
Step 1 – If you do not already have one, you need to get a Federal Tax ID (9-digits). You can do it online here:
Step 2 – You will need a State account number. Some states may even have different account numbers for income tax and others (Unemployment Insurance Tax, e.g.). Check with your state’s revenue department first.
Step 3 – Choose a company payroll service or do-it-yourself payroll software and tools
- A full service payroll management company
- Local CPAs or bookkeepers
- A do-it-yourself payroll software such as Paycheck Manager
Step 4 – Require each employee to provide a W-4 (and I-9) to confirm legal working status and income tax withholding variables. A W-4 enables an employee to enter marital status and the number of allowances for payroll withholding calculation.
- Income tax withholding is calculated based on marital status, number of allowance, pay cycle, and the gross earning on the check. It is an estimate of the true income tax liability of the employee at the end of the year. When the employee files his/her 1040, he/she will get a refund or need to pay more taxes based on the amounts withheld on their paychecks.
Step 5 – Know the difference between pay cycle, payroll tax deposit schedule, and the importance of a payday
- Pay cycle is how often the company pays the employees. Typically, employees may be paid weekly, bi-weekly, monthly, or semi-monthly. It is a decision by the company.
- Payroll tax deposit schedule is when the business payroll taxes need to be paid to the IRS and State. A payroll tax deposit schedule is normally monthly or semi-weekly (1/2 week, 3 business days). The payroll tax deposit schedule is determined by the IRS and State based on the amount of employee payroll taxes.
- Payday is the date on the paycheck. It is critical for payroll tax calculations, tax deposits, and reporting deadlines. The company can choose any payday, but once the checks are issued, the tax deposit and reporting deadlines are set accordingly. Pay period (when the work was done) is not important, but payday is critical.
Step 6 – Deposit payroll taxes on time. Regardless of how the paychecks are calculated or prepared, make sure the business payroll tax deposits are made to the government on time. The penalty and interest calculations are automatic and high (start at 1% per day). If taxes are paid, even if the reports are late, the business may not be penalized (all taxes already paid).
Step 7 – File payroll reports on time. The IRS requires a quarterly form 941, an annual form 940 and W2s for business payroll reporting. Unlike a payroll tax deposit schedule, the deadlines are the same for businesses of all sizes. States often follow similar schedules for income tax, unemployment insurance, if applicable, and others as those for the federal returns.
So now that you have your first employee, it is time to get your small business payroll system and process in place. To save money, we recommend doing it yourself to learn the ropes and rules. This way, as your small business grows and more employees are added, it only gets easier. Employee payroll does not need to be a headache as you grow your company successfully.
We are here to help. Paycheck Manager is one of the best small business payroll softwares, helping you pay your employee payroll taxes on time and file the necessary payroll tax forms. We have been an IRS authorized e-file service provider for the past 17 years. We help to make small business payroll taxes are quick, easy and simple.