An EIN is a code assigned by the IRS that can be used to uniquely identify your company. Your new company will require an EIN application if you haven’t already done so. You may submit your registration at no cost via the website, by fax, or by regular mail.
Applicants from other countries can register via telephone. In contrast to the four business days required for processing a faxed application and the month it can take to process a mailed application, an Employer Identification Number (EIN) is immediately assigned once an online application is approved.
Locate your Employer Identification Number
In addition to the EIN, you should also obtain state and local tax identification numbers, depending on your location. To find out more about the EIN program and process, as well as how to apply, visit the IRS website.
Gather Employee Tax Information
To process payroll, it is crucial to gather the necessary tax information from your employees. This entails having them complete a W-4 and an I-9, while contract or freelance workers must provide a 1099. The forms contain crucial details about the employees’ legal status, tax deductions, and other pertinent information required to carry out payroll.
It is important to note that the IRS has specific requirements on when to submit these forms, based on the information provided by the employees. Check out the submission guidelines for W-2s and I-9s to ensure compliance with the law.
When it comes to 1099s, the rules for preparation and submission to both the IRS and employees are different. However, since most of the work involved in preparing these forms falls on the employees, your business will only need to spend a short amount of time – typically 15 minutes – distributing, collecting, and submitting them.
Determine a payroll schedule
After gathering all the necessary tax information for your employees, the next step is to determine your payroll schedule. There are four options to choose from: weekly, biweekly, semiweekly, and monthly.
Each schedule has its own benefits, so it’s important to consider what will work best for your business and employees. Be mindful not to select a schedule that leaves employees without pay for an unreasonable amount of time. It’s also crucial to research your state laws regarding payroll schedules, which should take around 15 to 30 minutes.
“Note that many companies opt for a biweekly or semimonthly schedule to align with their annual schedules, while some states mandate that hourly employees be paid weekly.”
Determine the gross pay of each employee
To calculate an employee’s gross pay, you simply multiply their hourly rate by the number of hours they worked during a given pay period. The most convenient way to track employee hours is through a spreadsheet. It’s important to repeat this process for every employee in your company.
Here’s an example to illustrate how to calculate gross pay: Suppose an employee worked 85 hours in your biweekly pay period and their hourly rate is $10. The pay period covers 80 hours.
- 80 hours x $10/hour = $800
- 5 hours x $15/hour (overtime pay) = $75
- Total gross pay = $875
If you’re using spreadsheet software to calculate your employees’ gross pay, you can likely complete all the necessary calculations within a few minutes. However, if you intend to compute gross pay manually for all your employees, it may take a few minutes per calculation, and this can quickly add up when you have a large team of workers.
Determine employee deductions, allowances, and other withholdings
Determining employee deductions and allowances is a crucial step in payroll processing. It involves taking into account various factors, such as federal and state taxes, Social Security, Medicare, 401(k) contributions, workers’ compensation contribution, and other benefits.
To calculate these deductions and allowances accurately, you must pay close attention to how employees fill out their tax-related forms and withhold the proper amounts. This process can be quite time-consuming if done by hand, as the rates for each category and employee vary. However, if you use a spreadsheet or payroll software to store and organize this information, it can significantly expedite the process and save time.
Calculate net pay and distribute payment to your employees
Once you have calculated the deductions, allowances, and other taxes, you need to subtract the total amount from each employee’s gross pay to determine their net pay. Net pay is the amount that each employee receives at the end of each pay period, which is also known as take-home pay. It is important to create a pay stub for each employee and maintain accurate records of all withholdings. This not only benefits your business but also helps you track the progress of each employee.
Once you have calculated net pay for each employee, pay them using their preferred payment method, if possible. Payroll is a significant expense for businesses, and while using a payroll solution may cost money, it can save you time and streamline the process. Payroll solutions can also provide your employees with various payment options, such as checks, direct deposits, and payroll cards.
Calculating net pay by hand can take hours, which is why many businesses opt to use a payroll solution. Even if you use a spreadsheet to calculate net pay, distributing payments to your employees manually can still be a time-consuming process.
Involves maintaining accurate payroll records and making any necessary adjustments to correct mistakes.
It is crucial to maintain accurate and well-organized payroll records. Having reliable records helps you to address any discrepancies between an employee’s net pay and what they expected to receive. Additionally, from a tax standpoint, it is essential to have these records readily available in case you need to work with the IRS. Errors can occur, but as long as you correct them promptly and honestly, you can recover quickly.
Keeping records is also critical for payroll taxes that you must pay out regularly. Most electronic methods for calculating gross pay, deductions, and net pay generate automatic records when you upload the files to cloud storage. Be sure to save a separate copy of any spreadsheets you used after processing your payroll.
For paper calculations and paychecks that are delivered by mail, you’ll need to maintain written ledgers and mailing receipts. While each of these steps can take only a few seconds, the time can add up significantly when you have several employees to manage.
Withhold, report, and pay payroll taxes
Calculating and withholding payroll taxes is a crucial component of processing payroll. You need to deduct income taxes, Social Security, and Medicare taxes from employee paychecks, as well as possibly pay FUTA, SUTA, SUI, and FICA taxes as employer contributions.
Fortunately, there are various online calculators available that can help you calculate payroll taxes like FUTA, FICA, SUTA, and SUI. You also need to keep track of your state laws to know when to issue payroll tax payments. Reporting new hires to the IRS and filing federal business taxes on a quarterly and annual basis are also important requirements.
These steps, along with calculating, reporting, and paying payroll taxes, can be time-consuming, particularly if you don’t have automated processes in place.