How to Handle Payroll Taxes for a Small Business (Easy Way)

As a small business owner, managing payroll can be a daunting task. From calculating employee hours to generating paychecks, there are a lot of moving parts that can quickly become overwhelming. However, with the right tools and processes in place, managing payroll can be much easier and less time-consuming. We’ll explain how to handle payroll for a small business so you get your payroll cut and taxes paid.

Lady doing payroll on a laptop

An Overview of How Payroll Works for a Small Business

The key to any payroll system is record retention. New employees will either need to fill out a W-4 form and make their elections for tax withholding or a form W-9 if they are independent contractors.

Once your year is complete as an employer, you’ll need to provide W-2’s for employees and 1099-NEC forms to nonemployee independent contractors that made at least $600.

With your initial forms in place, the next steps are to make sure you set up pay schedules and deadlines for payment, filing and taxes. You’ll need to pay both state and federal payroll tax.

Quickly you might notice that most small businesses use software to handle payroll taxes or outsource to a payroll provider.

Read More:

Filing Taxes Yourself vs Professionals | When to Hire a Pro

Should I Run Payroll for My Small Business or Outsource?

Do you want to handle the entire payroll process? It will surely take time out of your day-to-day activities and making sales. Are you confident you’ll miss no deadlines, tax payments and can do it all yourself? Probably not. Ideally, you’d need to do the following:

  • Calculate employee’s hours worked, gross and net pay.
  • Account for wage garnishments
  • Ensure payroll tax payments are timely
  • Correctly account for federal and state taxes, medicare and social security
  • Ensure direct deposit hits employees’ accounts on time or that they get pay in person.

We get it, initially, many small business owners think they can do payroll for less than 10 employees but they quickly realize there are a lot of moving parts. That said, let’s go over some of steps to run payroll for a small business.

Step 1: Payroll Budgeting: Why You Need a Payroll Budget

You can’t really pay payroll without knowing how much you are going to pay. It’s crucial that a payroll budget is the first thing you do when setting up a small business’s payroll. It doesn’t have to be extensive but it the payroll budget should at least include the following:

  • How many employees you expect to have
  • What are the pay ranges for the roles of the employees
  • Build in a small buffer for staff turnover
  • Don’t forget year-over-year salary increases

Compile all that in a spreadsheet and you’ll have your starting point for a payroll budget.

Step 2: Make a Payroll Schedule You Can Stick To

One of the first steps to streamlining your payroll process is to establish a consistent payroll schedule. This means deciding on the frequency of pay periods and sticking to it. For example, you may choose to pay employees bi-weekly or monthly. Once you’ve established your schedule, let your employees know when to expect their paychecks. There should never be any doubt to employees when they will receive their paychecks.

Read More:

Can An Out of State Accountant Do My Taxes? (Must Knows)

Step 3: Tracking Employee Hours (A Must)

Maybe you don’t need to track hours if you have salaried employees but when it comes to hourly employees, you need a system in place. Accurately tracking employee hours is critical for ensuring that employees are paid correctly and on time.

 There are a variety of tools available to help you track employee hours, including manual timesheets, time clock software, and mobile apps. Choose a tool that works best for your business and ensure that employees are trained on how to use it. Once they are trained and reporting hours, eventually you’ll want to set up a control to audit some of those hours. There isn’t much worse than employees who are taking advantage of their hours worked.

Step 4: Calculating Payroll Taxes (Federal & State)

Calculating payroll taxes can be complex, but it’s important to ensure that you’re complying with federal, state, and local tax laws. The easiest way to do this is to use payroll software that automatically calculates taxes based on employee earnings and tax rates.

When you calculate your own payroll tax, you’ll need to be up-to-date on changes to tax laws that may affect your small business. This is where outsourcing again comes in handy when you can hire experts in the payroll field.

Now would be the time that you want to check if you need to apply any wage garnishments as well.

Step 5: Generating Paychecks 

Money flying from payroll

Once you’ve calculated employee earnings and taxes, it’s time to generate paychecks. The complex part is all the paychecks won’t be the same. You can do this manually or use payroll software to automate the process. If you choose to generate paychecks manually, be sure to double-check your calculations. At least with software, you are mitigating the risks for calculating incorrectly from week to week vs using an excel.

Step 6: Set up Direct Deposit

Offering direct deposit is a convenient option for both you and your employees. With direct deposit, employees receive their paychecks directly in their bank accounts, eliminating the need for paper checks. Generally speaking, it is easier to track direct deposits than cutting checks or cash.

 Set up direct deposit with your bank so that you can pay out of your payroll account and ensure that employees provide their banking information. You should then be able to link the two to facilitate payment by your scheduled pay dates post your review of payroll.

Step 7: Keeping Accurate Records & Storing Them

It can’t be stated enough how important it is to keep accurate records of all payroll-related transactions. This includes employee hours, earnings, taxes, and any deductions or contributions. Use a payroll software like ADP or a spreadsheet to keep track of this information. 

You are going to want to keep this information for multiple years. Cloud-based is the best way to go even if you are using a spreadsheet. Your small business needs to keep payroll records in case of a dispute with an employee or taxing authority down the line.

Step 8: Review and Audit Your Small Business Payroll Regularly

The final big step is reviewing and auditing. You’ll always want to review and it is best practice to have two individuals sign off on payroll before cutting it. This will help you identify any errors or discrepancies and ensure that you’re complying with all tax laws. Try to do full review your payroll records at least quarterly. On a yearly basis, consider hiring a CPA to perform an audit on your small business.

Is Outsourcing Payroll Expensive for a Small Business?

Outsourcing payroll really isn’t that expensive. Software options start around $30 a month for small businesses and they are set up to deal with calculations, deposits and reporting. Generally, there is a fee per each employee/payee that you add on but it is usually less than $10 per person.

In total, you might be looking at a cost of around $250 per employee, per year. Now whether you want to use an accounting firm to outsource your payroll or have it fully managed by a team behind a software solution, that’s up to you!

Not only will outsourcing payroll generally lead to better record keeping but it can also help minimize efforts and you’ll always have the latest and greatest payroll software.

Overtime: Things to Keep in Mind as A Small Business

New business owners are often eager to bring on new employees and shift work off their plates. Keep in mind that the Department of Labor says a workweek is 40 hours. Whenever an employee exceeds the 40 hour threshold and is non-exempt then they are eligible for overtime at a rate of at least 1.5 times their normal rate. Exempt employees can be exempted from overtime provided they meet minimum pay requirements. Furthermore, exemptions from overtime can be set at the federal and state levels.

Payroll Tips for Small Businesses (Best Practices)

We’ve touched on how to handle payroll as a small business but we want to leave you with some common good practices and also things to avoid.

  • Make sure you store all W-4s and W-9s in a safe place. This goes for all payroll paperwork!
  • Ensure you are aware of federal and state tax remittance deadlines. Get a spreadsheet going if you aren’t using a software that helps you.
  • Get direct deposit set up and make it a choice for employees.
  • Don’t let your payroll process get too complex. That’s why software can be helpful.
  • Make sure you don’t skip audits of your payroll processing. Not only does it make sure your numbers are correct as a business but also for your employees.

Common Mistakes of Payroll (Make Sure to Avoid)

While there are a lot of things you can do to improve your payroll, above, there are thing you should strive to avoid.

  • The big one: stop paying people manually and tracking hours using time cards. Go digital!
  • Forgetting overtime pay rules and not calculating frequently enough.
  • Mixing up contractors as employees or vice versa.

Out of all of them, make the move to switch digital if you aren’t already. Everyone from manufacturing to restaurants can be digital in this day and age for time tracking. It is one of the biggest shifts you can make in a payroll process.

How to Handle Payroll Taxes for a Small Business: Final Thoughts

If you are just starting a new small business and payroll or payroll taxes are one of your biggest concerns then using good software and outsourcing are easy solutions. While it is always good to have an understanding of payroll, keep in mind that you can hire someone to take care of it. Handing payroll taxes are an essential part of any small business so get help early if you need it and you’ll be just fine. 

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