How much do you really know about paying employees? As a new business owner, you’re not ready to hire people unless you understand the ins and outs of payroll.
When you first open a new business, you won’t have to worry too much about paying employees. Reason being, many startup businesses don’t have employees at the very beginning.
But as your new business starts to grow, you’re eventually going to have to hire more people to help you run it. You’ll need to bring new employees onboard and figure out how to pay employees the right way.
If you don’t pay employees the way you should, it could complicate your entire operation and cause your business to lose money. It could also put you in a real bind when it’s time to do your taxes.
It’s essential for you to work your way through the right steps when it comes to paying employees. Here is a useful guide that will help you pay your employees without running into any problems along the way.
Obtain an Employer Identification Number From the IRS
Before you can even begin to think about paying employees, you’re going to need to obtain an employer identification number from the IRS. This is a number that is unique to you and your business, and you’re going to use it early and often when it comes to providing payments to your employees.
It’s simple enough to get an EIN from the IRS. You can apply for an EIN through the IRS online within a few minutes.
Just make sure that your new business is legally formed and ready to go prior to working your way through the process.
Set up a Payroll System
Once you receive an EIN from the IRS, you can start to set up a payroll system for your employees. You can purchase payroll software that will make it easy for you to pay each of your employees for every pay period that they work.
You will, however, need to spend some time making important decisions while setting up this payroll system to ensure it runs smoothly. You’ll need to decide:
- Which employees you’re going to add to your payroll system
- How much you’re going to pay each of them
- How often each of them will be paid
You’ll also need to figure out if your employees are going to be full-time, part-time, or even independent contractors (in which case, they won’t technically be “employees” but will still need to be paid).
Additionally, you’ll need to get a bunch of information from each of your employees, including their full names, their home addresses and phone numbers, their social security numbers, and more.
At first, gathering all this info might seem like a tedious task. But as long as you put down a good foundation for your payroll system, it should help to make it easy to add new employees to payroll as you move forward.
Decide Which Payment Method to Use When Paying Employees
We just mentioned a lot of different decisions that you’ll need to make when you begin paying employees. But we left one of the biggest decisions out because it deserves its own section.
Outside of deciding everything we talked about above, you’re also going to need to figure out which payment method you’re going to use to pay employees. Are you going to:
- Hand them a check after every pay period?
- Deposit their paychecks right into their bank accounts?
- Provide them with employee pay cards?
These days, most businesses are choosing to go with the second option listed there. More than 80% of them are providing their employees with direct deposits.
This is often going to be the simplest option for you and your business. It could cut your costs since you won’t have to worry about paying for paper checks or pay cards.
Ask Employees to Provide Information Regarding Deductions
In addition to paying employees the proper wages, your new business is going to be responsible for taking taxes out of their paychecks. You’re also going to be in charge of withholding money to cover the costs associated with health insurance policies, retirement plans, and more.
This is where things can start to get tricky for new businesses when they’re not organized. You’re going to end up getting your business into a world of trouble when the proper deductions aren’t taken out of paychecks.
The good news is that it’s not that hard to obtain the info you’ll need to know how much money to withhold from each of your employees’ paychecks. You’ll use the following forms to determine deductions:
- Form W-4 for federal income tax withholding
- State income tax withholding form (if those in your state are subjected to state income tax)
- Benefits forms
It’s best to have new employees fill all these forms out as soon as they accept a position with your company. Otherwise, you could be forced to chase employees around later in an effort to get the info you need to take out deductions from their paychecks.
Start Using Your Payroll System
Provided you’ve done everything right so far, you can start paying employees using your new payroll system. You can also start to iron out any kinks that you find with your payroll process.
If your employees are hourly workers, using your payroll system should be as easy as entering the number of hours they worked during a pay period and their rate. If your employees are salaried, taking their salaries and dividing them by the total number of pay periods you have in a given year should produce their gross pay for each pay period.
Either way, you’ll then take the amount owed to an employee and deduct the necessary taxes and benefit payments from it. This will leave you with the amount that you should pay them in the form of a check, a direct deposit, or a pay card.
When you’re first getting your payroll system off the ground, be open to any feedback that your employees might have and work to correct mistakes right away. It’ll help you build up trust with your employees and get your payroll system working the way you want it to.
Provide Employees With Pay Stubs
Regardless of how you choose to go about paying employees, you should always make sure that they’re given a paystub for every pay period. Use a check stub maker to create pay stubs that you can hand out to them.
Your employees can use their pay stubs to keep track of how much they make every pay period. They can also use them to do things like verify their income or prove their employment.
You can use pay stubs, too. They’ll come in handy for tax purposes and will give you a reference point if an employee ever disputes a payment or a deduction that you made.
Plus, on top of all this, handing out pay stubs to your employees will keep you in line with the law. Most states have laws on the books mandating that businesses must supply their employees with pay stubs to avoid penalties.
Report How Much Employees Are Paid to the IRS
It’s important for you to follow all the steps listed here when paying employees because, at the end of the year, you’ll need to let the IRS know how much your employees made.
The IRS asks businesses to fill out Form 941 or Form 944 to show both how much they paid to each of their employees and how much they withheld from their paychecks for taxes. The IRS also asks businesses to send W-2 forms to their employees letting them know how much they were paid and how much was withheld from their paychecks for taxes.
You do not want to get your business on the IRS’s bad side by failing to fill out the proper forms or forgetting to send employees the proper paperwork. You could face all kinds of possible penalities by not complying with the IRS’s demands.
This is one of the main reasons why it’s so essential for you to set up a reliable payroll system and create pay stubs when paying employees in the first place. You’ll remain in good standing with the IRS when you do these things.
Make Sure You’re Not Making Mistakes When Paying Employees
When you start adding employees to your new business, it should jumpstart your company and spark growth. Your new employees should add new ideas to the mix and take your business to the next level.
But they could also be the downfall of your business if you don’t come up with the best way to go about paying employees. You could have a bunch of unhappy employees on your hands and you could also make the IRS very mad by not establishing a good payroll system.
Put the tips found here to good use so that you don’t have any problems at all when paying employees. Your employees will appreciate you for it, and you’ll sleep better at night knowing your business’ financial affairs are in order.
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