The management of payrolls in a small business is a small bit a challenge, but it is very important because it enables the right amount of money to be given to the employees at the right time. It is also crucial for tax compliance since systematic payroll will assist you to meet your contractual obligations to the authorities. Small business owners can use this simple guide to understand how to manage payroll in their businesses legally and satisfactorily.
Step 1: Collect Employee Information
Employer should also collect other employee information that he or she requires about the employee that include full name, the current address, social security number, his or her status on the W-4 form and details of the bank account in which the employer intends to deposit the paycheck of the particular employee. Independent contractors, make sure you have the W-9 form of the contractors you hired. Vital records are important for filing tax and to provide the right pay & benefits to the employees depend upon their position and interests.
Step 2: Choose a Payroll System
Choose a payroll system with the level of complexity and the size of the company. There is also manual processing of payroll but most small business uses software to assist in processing of payroll or hire experts who handle the payroll. Some of the advantages of using payroll software includes that, they reduce or eradicate instances of making errors so far as taxes, benefits and deductions are concerned since the whole process is computerized.
Step 3: Calculate Gross Pay
These include team leader, deputy team leader, and ordinary employees To arrive at employees’ gross pay you need to use the hourly rates agreed upon while on duty as well as number of hours worked for entry employees, while for the other employees, you need to use their agreed upon salaries.
Overtime pay, bonuses or commissions have to be added to the total where the is a necessity. Customers should also ensure any amount that they were owed in terms of other benefits including unpaid vacation or sick pay has been factored in the calculation of what they will pay their employees.
Step 4: Deduct Taxes and Benefits
Subsequently, determine the required deductions. Such taxes may be federal or state or local income taxes, Social security taxes, Medicare taxes and any other legal deductions. Further reduce by deductions made on things such as health and other insurances , retirement savings , and any other voluntary deductions made on employees pay slip. This will help you to minimize on possible mistakes that could result to tax penalties because of using the wrong tax rate.
Step 5: Pay Employees
There are certain steps which need to be followed in order to calculate the gross pay and deductions of an employee, and now it’s the time to pay your employees. It can be done directly through payee’s account or through account number(s) in his bank through banking check or other available means of payment.
Some of the possibilities include: In most cases, direct deposit is the most effective one, and employees are paid quickly and securely. It should also be a practice to always issue pay slips to all of the company’s employees with an analysis of the employee’s earnings and the deductions that came along with it.
Step 6: Keep Detailed Records
Record keeping of payroll is extremely essential in addressing compliance and tax regulation issues. Make sure that you maintain employee pay related records for at least thirty-six months. These are things like payroll reports and tax documents (like W-2s or 1099s) and payment confirmations. Proper documentation also facilitates easy audits, and in the case of a disagreement, everyone will have references to which they can refer.
Step 7: File Payroll Taxes
Pay federal and state payroll taxes before the due dates to learn of penalties from the IRS and state authorities. This comprises filing Form 941 pay-roll tax reports as quarterly and other forms such as W-2 and W-3 as annual ones. Know the dates for tax deposit and filing. It is also possible to do it on your own, or could hire an accountant or an idea of payroll service to avoid any penalty.