You’ve got a business, and you’ve got employees. All you have to do is write a check and pay them, right? (Insert the sound of almost any vehicle screeching to a stop here.) Well, not so fast.
In order to be compliant, meaning that you’re following all the applicable rules and regulations, you’ll need:
Accurate employee information
- First off, you need an Form W-4 from every employee and Form W-9 from every contractor in order to get the their relevant tax and identification information.
- You must verify that each employee is legally able to work in the United States by completing Form I-9.
- You should verify that each employee’s social security number (SSN) is valid.
- You must also confirm that each employee’s name matches the one that’s shown on their Social Security card. It’s also useful to verify mailing addresses. Both of these can be done by simply asking the employee. This helps prevent errors whenever you’re reporting employee information to the Internal Revenue Service (IRS) and/or other entities.
Employer identification numbers (numbers with an “s” — as in more than one.)
- You need an employer identification number (EIN) from the IRS, which will become the ID number you’ll use to identify your business with the IRS, Social Security Administration (SSA), and Department of Labor (DOL).
- In addition to the federal government, you also need ID numbers for any state, territory, or district in which you do business. Check each state’s department of labor and department of revenue for details on registering your business.
- Some areas also have local tax authorities that may also require an ID number.
- Keep track of these numbers, and make sure you use the same business name and address on all of the forms and documents
A business banking account
- Business banking accounts are a financial best practice, as mingling business and personal accounts is a path you want to avoid at all costs.
- You want to ensure that you always have adequate funds in the account you use for your payroll and that the account structure allows for payroll transactions, such as issuing multiple checks all at once (especially if you run your payroll manually).
- If you choose to use a payroll service, a majority require business accounts for security and fraud prevention.
An understanding of income taxes and payroll taxes
- Employers have specific tax obligations in relation to income and payroll taxes.
- Income taxes
- Income tax is a pay-as-you-go tax that the employer withholds from the employee’s check each pay cycle.
- Federal, state, and local income tax are determined by tax tables created by the federal, state, and local authorities.
- Every employer must withhold federal income tax from their employees’ checks. These amounts must then be paid, on a regular basis, to the IRS.
- A majority of states also have income tax and certain local/regional tax requirements as well.
- Payroll taxes (employment taxes) include:
- Medicare and social security (FICA taxes) — employers and employees each pay an equal amount, with the employer withholding the employee amount and contributing the employer amount.
- Federal and state unemployment taxes (FUTA and SUTA) — 100% employer-paid.
- Some states also require workers’ compensation and/or disability insurance.
- Income taxes
A knowledge of the key labor laws affecting payroll
- The Fair Labor Standards Act (FLSA) — The federal law that establishes minimum wage and overtime. Some states have their own minimum wage and overtime requirements that go above the federal requirements.
- Federal Insurance Contributions Act (FICA) — The law that requires the withholding for social security and Medicare.
- Affordable Care Act (ACA) — Meant to increase the affordability and options for small businesses, the application of the rules varies based on the number of full-time employees along with their rate of pay. A polarizing political topic, the ACA may see future revisions or be replaced with new legislation. It’s best to stay informed by following credible sources like the Small Business Administration (SBA).
- No one is born a payroll expert. In fact, certified payroll professionals go through significant training to earn their designations. You can learn more about payroll through:
- Small business payroll software
- The good news for small businesses is that technology has recognized their needs, with payroll tools that are part of accounting software or separate applications that integrate with accounting software.
- Your bookkeeper or accountant may have a preference of which tool to use.
- If you’re going it alone, explore your options. Call a sales rep, ask questions, request a demo and learn as much as you can to make an informed decision.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.