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Payroll Accounting 101: How to Get Started In 5 Easy Steps
Payroll is a crucial part of every business, whether small or large. And learning how to do payroll accounting unerringly becomes inevitable as soon as you bring on board the first employee(s). The truth, however, is that getting a handle on payroll accounting isn’t as easy as it sounds. It involves several different complex components, from tax calculations to 401(K) and everything in-between
The whole payroll process can be quite overwhelming, especially to a start-up business. Besides, you have to stay on top of all applicable tax laws mandated by the state and federal governments. But, more crucially, all these payroll processing tasks might derail you from focusing on what matters most: growing your business.
Well, that’s why we have prepared this 5-step guide to getting started in payroll accounting for small business.
Step #1: Preparing to Hire
In an ideal sense, a turnkey payroll system should be able to help you with three critical tasks: (1) pay the working staff, (2) prepare and pay payroll-related taxes and (3) file tax reforms. This first step helps ready your business to hire and eventually pay employees.
Here are crucial things you need to do before making the first recruitment:
a) Apply for a Federal Employer Identification Number (EIN)
EIN is a unique number IRS assigns to your business for tax payment and reporting purposes. Sometimes referred to as Tax ID or FORM SS-4, EIN can also be used by state government agencies to identify your business and track all tax deduction payments you make to them. You can obtain EIN for free directly from the IRS.
Important note: certain states, including Massachusetts, New York, and South Carolina, require separate, state-assigned EIN for tax purposes.
b) Choose the right Pay Type
The next step is to settle on wage or salary level for each employee. Also, you’ll have to decide whether you’ll pay your staff an annual salary or hourly.
c) Pick Your Pay Period
Generally, the more pay periods you have, the more complicated your payroll processing will be. Nonetheless, you’ll need to select a pay period that works best for your business. It could be weekly, biweekly, or monthly.
d) Employee Benefits
No payroll is complete without employee benefits. Whether you’re offering your employees a health insurance plan or a 401(K), you’ll need to decide what each party will contribute.
e) Take Out Workers’ Compensation Insurance
Workers’ compensation insurance protects employees who suffer personal injury or become ill while at the job. It’s mandatory in all states except Texas.
Step #2: Obtaining Employee Tax and Payroll Forms
Once you hire an employee, you need to gather paperwork (both tax and payroll forms) required for them to get paid. These include:
W-4 Form: every employee must fill out the W-4 form for effective and accurate tax calculation. The form allows the employee to furnish you with their dependent allowances, marital status, and tax exemptions, to name a few.
I-9 Form: this form is used to verify that the employee is indeed a US citizen or has a work permit.
Direct Deposit Authorization Form: If you are paying your employees through direct deposit, make sure that they fill out this form.
Step #3: Producing Payroll/Calculating Employee Paychecks
Once your employees are set up in your payroll system, it’s high time to calculate their paychecks. You can do it manually, but that’s a huge hassle. To avoid inadvertent mistakes and take pressure off of your shoulders, it’s best to use payroll automation software. With nifty software like Gusto or Quickbooks, calculating paychecks is a breeze.
Step #4: Recording Payroll
Certain payroll-related entries must be recorded and kept in payroll accounts for IRS purposes. The good thing is that the whole process can be automated using payroll software.
Step #5: Filing and Paying Payroll Taxes
As an employer, you eventually should remit taxes deducted from your employees to IRS and state agencies as well as produce relevant reports, including IRS forms 940, 941, W-3, and W-4. These reports are usually due either quarterly or annually.
Congratulations! With these handy steps, you can avoid payroll pitfalls and set your business up for success from the outset.