New small business owners often make the common mistake of thinking that payroll only involves tallying the time worked for each employee and paying them accordingly. It’s not quite that simple. First, you need to apply for an employer identification number and complete multiple other steps before you can even hire employees. Then you need to abide by complex payroll regulations at the federal, state, and sometimes local level. A mistake, even if it’s an honest one, could cost you in the form of fines or other penalties imposed by the taxing body. Here are some tips on how to avoid that.
Start by Having Each Employee Complete a W-4 Form
The Internal Revenue Service (IRS) W-4 form requires employees to provide their name, contact information, social security number, and the number of exemptions they wish to claim. You then use this data to determine how much tax to withhold from each employee’s paycheck. Be sure to encourage your employees to update their W-4 annually since their situations may change and they might not think to have their tax withholdings reflect that. Each new employee also needs to complete an I-9 form that proves their eligibility to work in the United States.
Withhold Money from Employee Paychecks
The amount of federal and state taxes that you withhold from each employee’s paycheck depends on his or her earnings and number of exemptions. The IRS and your state taxing authority should provide you with charts when you register as a business, but if not, you can find this information online. In addition to these taxes, you also need to deduct for social security and Medicare. You pay 50 percent towards the total deduction for each employee and he or she pays 50 percent. For 2020, the IRS mandates 12.4 percent for social security (FICA) and 2.9 percent for Medicare.
Remitting Withheld Taxes
The IRS requires businesses to make monthly or semi-weekly deposits of withheld tax amounts. It determines your schedule by the size of your payroll and the amounts withheld. Each state operates its own payroll tax system. You will need to make separate deposits for federal tax, state tax, social security, and Medicare. The IRS offers an electronic filing system for this purpose. You can also submit the funds manually using Form 8109. As an employer, you must also pay into your state’s unemployment and workers’ compensation funds.
These deposits also come with reporting requirements. Every three months, you must report the amount of your payroll tax obligation and how much you have paid towards it. You should use IRS Form 940, called Employer’s Quarterly Federal Tax Form, to complete this task. The IRS also requires an annual unemployment report using Form 941. This form should list your total unemployment liability and how much you have paid towards the liability.
This is Only the Beginning
After all that work, you still need to set up a separate payroll account, decide on an accounting system, calculate net pay, write and distribute checks, and get direct deposit established for employees who exercise that option. You can save yourself a lot of time, not to mention the frustration of IRS or state penalties, by outsourcing your payroll to the professionals at Palmetto Payroll. Please contact us today to learn more about our services.
