How to Handle Payroll: A Basic Guide for Small Business
Making sure your employees get paid the right amount at the right time is one of the most important things you will do as a small business owner. Making sure your payroll taxes are paid accurately and on time is equally important.
Payroll encompasses three important elements – paying employees, paying federal and state taxes, and reporting requirements at the federal and state level. There are several ways a business owner can choose to handle payroll and your SBDC Advisor can help you figure out which is best for your business.
Manual (you as owner figures out each paycheck, pays federal and state taxes, and files appropriate paperwork)
Pros
Low cost
Have control over the entire process
May be able to use existing account software, like Quickbooks, to help with the process
Cons
Opportunity cost in time that could be spent doing other things for the business
Requires owner to research and stay on top of federal and state tax legislation
Hire staff to do payroll
Pros
Can be lower cost than a service provider, depending on number of employees
Have control over the entire process
Cons
Liability of paying employees or taxes incorrectly rests entirely with the business
May be difficult to find someone with the right expertise
Risk of staff turnover
Outsource to a payroll service, accountant, or bookkeeper
Pros
Typically take responsibility for and correct any payment errors.
They are experts in the field.
Cons
Costs are higher than other methods
Must research and find a reputable firm
Use an online service
Pros
Typically take responsibility for and correct any payment errors.
They are experts in the field.
Allows insight into the process through online dashboards
Many offer onboarding and other HR operations services
Cons
Costs are higher than manual method
Might need to try several before finding the one you like best
Some things to think about when choosing a method are: the number of employees you have, the cost of the service per employee, and if you are interested in human resource services like insurance and retirement along with payroll. An Internet search for “online payroll services for small business” will give you a list of many services available and reviews for each. You can also ask your SBDC Advisor to weigh in on your options and check with others in your industry.
Requirements for Every Employee
Whether you decide to handle payroll manually, outsource to a payroll service provider, or use an online service, there are certain things business owners need to do and be aware of. First, make sure you have a Federal EIN. While this is optional for some small businesses, it is a necessity if you have employees. The IRS Small Business Center and its page on Hiring Employees have valuable information and can walk you through the process.
For each new employee, you must collect certain documents:
Each employee should have an I-9 form on file for three years after their hire date or one year after termination, whichever is later. Instructions and forms can be found on the USCIS I-9 Employment Verification web page. The I-9 verifies an employee's ability to work in the United States.
Get each employee’s Social Security Number for their W-2 form. You are not required to copy their card, but you may. The Social Security Administration offers an online verification service for employers.
For each employee, you should collect a Federal W-4 and Virginia VA-4. These forms tell you how much Federal and Virginia income tax to withhold from an employee’s paycheck.
In addition, employers should be aware of any additional withholding the employee has requested, the employee’s tax filing status, any non-taxable deductions (like retirement or healthcare premiums), and benefits like paid time off or sick leave.
Operations
Once your employees are set up with all the required documentation, it’s time for them to get to work! Making sure you have an easy and accurate way to record time for hourly employees is essential. The process and expectations for clocking in and out should be recorded in an employee handbook and covered during the onboarding process.
For hourly employees, there are many ways to handle the employee time recording process, from written timesheets to using an online system. You may find that your existing accounting software (like QuickBooks) or your point of sale system (such as Square) can be used for tracking employees’ time. If you decide to sign up for an online service provider to handle payroll (more on that in a minute), it may have an integrated time recording system.
There are several posters that the Virginia Employment Commission requires employers to post and some are related to wages, unemployment, and taxes. You can find them at the required posters web page, where you can print them yourself or order printed ones online.
Tip Income
If your employees receive tips, there are extra steps they and you need to go through for figuring out and reporting income. This can be a complex and confusing subject, but your SBDC Advisor can guide you through it. Business owners whose employees receive tips will also want to look over the IRS publication on the subject.
Which Taxes to Pay
Employers must pay both federal and state taxes related to their employees. If you opt to hire a professional service (an accountant or bookkeeper) or an online service, they will take care of paying these taxes for you. This can be a huge time savings for entrepreneurs, allowing you to focus on running and growing your business and not spend hours a month on payroll. Also, many services guarantee correct tax payments and will pay for any errors they make.
Taxes paid by employer through a payroll service or directly to Federal and State government
Social Security: 6.2% up to wage cap of $142,800 (for 2021)
Medicare: 1.45%
Federal Unemployment Tax
Virginia Unemployment Tax
Taxes paid by employee through paycheck deductions
Social Security: 6.2% up to wage cap of $142,800 (for 2021)
Medicare: 1.45%
Federal Withholding (based on W-4)
Virginia Withholding (based on VA-4)
Your Roanoke Regional SBDC Advisor can help you understand the payroll process and help you figure out the best way to handle payroll for your business. If you opt to do payroll manually, it’s a good idea to become familiar with federal and state labor and pay laws, such as minimum wage, workers compensation requirements, information you’re required to include on a paystub, and more. The Virginia Employment Commission Employer’s page is a good place to start.
Note: Federal and state tax laws change. Check with the state, the IRS, or your accountant to be sure you have the latest information. If you do not have a payroll service provider on your team, search for online paycheck calculators that generate the proper net pay for each employee.
When and How to Pay Taxes and Recordkeeping
If you choose to outsource your payroll needs or use an online service, you don’t need to worry about this section – your service provider will take care of this for you. If you are doing payroll yourself or have an employee dedicated to payroll, then keep reading.
Federal Taxes
Deposits for employer and employee Social Security and Medicare taxes, and federal withholding, must be made using the Electronic Federal Tax Payment System, or an electronic payroll system like Quickbooks.
The IRS Guide to Depositing and Reporting Employment Taxes and Employment Tax Due Dates will be critical resources if you are filing taxes manually or have an employee who handles payroll.
At the end of each quarter, the business must complete and file IRS Form 941, which reports on employees, wages, and taxes paid.
Virginia Taxes
Withholding tax is due quarterly, monthly, or semi-weekly, depending on the business’s tax liability.
Businesses should register at tax.virginia.gov to pay all Virginia taxes (sales, income, payroll, etc.)
The web pages on Electronic Filing Requirements and Recordkeeping Requirements can guide you through the process.
Payroll is a critical part of your business, but can also be confusing. Your SBDC Advisor can walk you through the entire process.
Fortunately, there are services that can help you automate the payroll process so every paycheck is on time and on target. Click here to hear one small business owner’s story: Gusto!