1. How to decide if you have payroll processing responsibilities

As a small business owner, one of the first questions you may have is, “Do I need to process payroll?” The easy answer? If you have employees, or use independent contractors, then you need to run payroll. It’s no shock that the IRS expects you to play by their rules – when it comes to taxes, employee paperwork and reporting regulations.

Your payroll responsibilities include withholding, reporting and paying federal, state and local taxes on time and using the proper forms. If you make an error in any of these areas, your small business could face hefty government fines.

Not every small business owner needs to process payroll. If you are an “owner-only” business, you may not have to run payroll. But chances are you’ll still be liable for self-employment taxes.

The key point to remember is that if you have any employees or employ any independent contractors, then you must process payroll.

2. Should you consider outsourcing payroll?

If you’re managing payroll in-house (manually or with software), and you’re comfortable with the process, my hat is off to you, and I hope you find the tips in this article helpful. However, there are other options. Turning your payroll over to an outside payroll service can:

  • Save you time
  • Help you avoid payroll errors
  • Protect you from costly IRS penalties

There are traditional, phone-in or fax-in payroll services and full-service

online payroll services that allow you to process payroll through the Internet. These services will calculate wages and deductions and take on your payroll tax management. Many accountants will also handle payroll for you. If you’re interested in learning about the benefits of outsourcing payroll, workz.com offers some compelling reasons to make the switch.

3. What you’ll need to do on your own if you don’t outsource your payroll

If you’re a start-up business owner planning to process payroll in-house, chances are you have a lot to learn. Don’t feel bad – payroll is one of hardest administrative tasks small businesses face.

For starters, you’ll need to:

  • Obtain an FEIN (Federal Employment Identification Number) from the IRS
  • Become familiar with the IRS Publication 15, Circular E
  • Learn about your state and local payroll taxes, including obtaining your SUI (State Unemployment Insurance) number and rate

You’ll also need to collect forms and informationfor each employee, including an I-9, W-4, plus benefits, banking and deduction information. Deciding on a payroll frequency – weekly, bi-weekly, semi-monthly or monthly – is entirely up to you, and may depend heavily on your cash flow situation. If, like I do, you find even the table of contents to the IRS Publication 15, Circular Eincredibly daunting, you may want to consider making a Starbucks run before you begin learning the ropes.

4. How to determine employee earnings

Paying your employees is one of the most important tasks of processing payroll – after all, they don’t come to work each day only for the love of the job (as much as you might hope that’s true). They expect to get paid on time and accurately.

Calculating your employees’ paychecks is relatively simple if all of your employees are salaried. But you may have a combination of salaried and hourly employees, independent contractors and employees who receive commissions or bonuses.

Here are some of the extra stepsyou may need to take when processing payroll:

  • Check the time records of hourly employees
  • Calculate overtime pay for hourly employees
  • Add commissions or bonuses
  • Count sick, vacation or personal days

Check out this article from Priority HR about the top 5 most costly payroll errors, and you’ll see how important it is to calculate your employees pay correctly.

5. Understanding your payroll processing obligations

Your payroll processing obligations – and hassles - basically come down to 3 things: taxes, taxes, taxes. Empagio’s thorough study of why many companies choose to outsource payroll emphasizes the relief you’ll feel from handing off your tax headaches.

Why is it so important to understand payroll tax obligations? Because small business owners who fail to comply with government regulations could face civil or criminal penalties.

You’ll need to know the rules for dealing with your employees’ tax withholdings, depositing and filings. There are complex regulations about when you must deposit federal, state and local taxes, and which forms to use for each. And I haven’t even touched on SUI rates and rules…

Look for more posts to follow. Many more posts.

6. New hire reporting

When you hire a new employee – you guessed it – the government needs to know. You’re responsible for reporting your new hire to the appropriate state agencies. And, you need to do it on their schedule.

There are formsto be collected from the employee, like the I-9 and W-4, and rules associated with how long you need to keep each form on record.

I strongly recommend that you create a formal process for collecting, storing and submitting new hire information so you stay on the government’s good side. And if, like many small business owners, you wear more proverbial “hats” than you do other clothing, a reliable payroll service can take new hire reporting off your plate.

7. What you need to do when you pay an employee

Seems like a no-brainer, right? Not so much.

You’ll need to withhold employee federal income tax based on the number of withholding allowances and marital status of the employee. You’ll also need to withhold the correct amount of state and local income tax.

I’ve included a quick way to estimate an employee’s net pay here. Look for a more detailed sample calculationin a future post.

It’s important to remember that the laws for state and local withholding can get tricky – for example, there are 9 states that don’t require you to withhold state taxes.

You’ll also need to decide whether to pay your employees with paper checks or by direct deposit, which today is considered the preferable method. I found an interesting article (from 2004, but still relevant) on the benefits of using direct deposit, for both employers and employees. If you’re not yet convinced that direct deposit is the way to go, make sure you read it.

8. Making payroll tax deposits

By now I’m sure you have the idea that tax regulations are the most complex – and crucial – part of payroll processing. Keeping track of payroll tax deposits requires fairly extensive tax knowledge and the memory of an elephant.

When and how you make your federal tax deposits depends on the amount of tax you have to deposit. Plus, you need to use the correct forms for annual and quarterly deposits. And remember – I’m just talking about federal taxes. You still have to worry about state and local tax requirements.

Failure to make timely, accurate deposits can result in fines that make credit card penalties look cheap. Using a payroll service protects you against tax penalties, and may even help you sleep better at night.