How do you set up payroll? That’s a question many business owners ask themselves as they begin to hire employees, whether full-time or part-time. However, you don’t have to go it alone; the government has provided plenty of resources to help you through the process of setting up payroll and managing your company’s human resources (HR).
This article will walk you through the first steps of setting up payroll with complete instructions on how to take care of all the necessary paperwork, taxes, and filings—from tax season to year-end reports—all on your own.
Choose the right Payroll Software
Depending on how many employees you have, how complex your payroll taxes are and your company’s specific needs, there are several different payroll software programs to choose from.
By working with a trusted payroll professional, you can determine what kind of software is best suited to meet your needs.
If you’re just starting out, consider using a cloud-based payroll solution that offers automatic updating of forms and instructions without added cost.
This will help ensure things go smoothly at every stage of setting up payroll.
Calculate gross wages
Once you’ve established your salary, you can use payroll software to calculate gross wages.
Gross wages are what an employee is paid before any deductions are made for taxes or benefits.
Because these values change as you grow and hire more employees, it’s important to know what they look like at all times, especially during tax season.
If a person has a full-time job, their gross pay is typically calculated by multiplying their hourly wage by 40 hours in a work week, then subtracting federal income tax and any state taxes that apply.
Total employee salaries should be reported on IRS form W-2 (which also requires employers to indicate whether health care coverage was offered as part of a worker’s compensation package). Make sure all forms are submitted to government agencies on time!
Calculate net wages
Take your gross wages and subtract any payroll taxes, Medicare deductions or insurance premiums you plan to pay as an employer.
You can use free tax-rate tables (provided by your state’s department of revenue) to figure out how much you’ll need to withhold from each employee’s paycheck in order to meet these obligations.
Net wages are what you actually give an employee after all deductions have been made.
Be sure that what you pay will be enough to cover their regular expenses—including rent or mortgage, car payments, food and other living costs—and any debts they may have.
When planning a business budget, it is important not only to consider how much money you will bring in but also how much money will go out
Calculate deductions
Calculating and collecting payroll taxes can be time-consuming and complex, but it doesn’t have to be.
Because each employee’s situation is different, there are a number of deductions that must be made from an employee’s gross pay (before any deductions) in order to arrive at net pay.
The Internal Revenue Service offers a tax calculator on its website that can help you determine how much in taxes needs to be withheld from each employee. You may want to contact your local state department of labor or tax authority for more information about state or local tax requirements.
Calculate social security tax and medicare tax withholding
Social security and Medicare taxes are usually split between employer and employee, so employers withhold a set amount from each employee’s paychecks.
The Federal Insurance Contributions Act (FICA) requires both employers and employees to contribute toward social security coverage. Self-employed workers are required to make their own Social Security payments.
The two forms of FICA tax are OASDI (Old Age, Survivors, Disability Insurance) and HI (Health Insurance). OASDI is withheld at 6.2% of an employee’s income
Know the Payroll Forms
If you’re a business owner, chances are you’ll be dealing with payroll at some point.
The key to staying compliant with state and federal regulations is knowing which forms to use (and when) and how they fit into your overall payroll management plan. Knowing what paperwork is required makes it easier to build out an accurate spreadsheet that will help you get paid on time and keep good records.
Simply put, there are just two types of payroll reports: quarterly (Form 941 or Form 944) and annual (Form W-2).
If your business employs less than 10 employees, you likely won’t have to file either form; even if it does, however, there are some things that may require a quarterly report as well.
At your company, you’re likely going to play a wide variety of roles, which means you’ll need to know payroll processes. How do I set up payroll? What forms do I need to file with HR? And how much should I expect to pay in taxes and fees at each step of payroll season? To answer all your questions, we’ve created an employee guide that covers everything from calculating FICA withholdings (FICA is short for Federal Insurance Contributions Act, which is a tax that funds social security and Medicare) to setting up an off-site payroll system and reporting. Use our resources as a starting point or use them as a one-stop resource; either way, you’ll be on your way to knowing all there is about setting up paychecks.