A great idea or opportunity came along and now your dream of starting a business is becoming a reality. Before you start getting products on the shelves, you need to hire a motivated, reliable team. And before you hire your team, you need to understand the basics of payroll.
Taking care of other peoples’ money isn’t easy. Despite being a mandatory component of any business, payroll remains one of the most commonly misunderstood processes for startups; indeed, statistics show that one in three small business owners make mistakes on their taxes or employee information and suffer ensuing fines. Before you consider the daunting task of taking on your entire startup’s finances and the accompanying aspects, be sure to educate yourself on these payroll basics.
Employer and Employee Obligations
Your obligations as a small business owner are variable but will often include most or all of the following responsibilities:
- Establishing a pay period
- Distributing and enforcing employee paperwork (i.e., W-4s)
- Keeping detailed payroll records
- Reporting payroll and employee taxes
- Implementing an effective payroll system
- Monitoring and enforcing employee compensation (i.e., sick pay, paid days off)
You also need to apply for an Employer Identification Number from the IRS before you begin hiring employees. In addition to all the above, you should check with your state’s legislature to see whether or not you need to have employee IDs on file for tax purposes.
Keep in mind that, while your employees are certainly in charge of filling out their paperwork in a timely manner and keeping their records up to date, you won’t be able to blame your employees for sloppy record keeping or poor management. Don’t risk a failed audit and the ensuing charges—make sure your employees file their documents.
What Comes out of a Paycheck?
While each employee can claim unique exemptions on their W-4, the general idea stays the same: you withhold state, federal, and local income tax, as well as unemployment, Medicare, and, in some cases, wage garnishments. As an employer, you have to report all withheld income absolutely in addition to paying it to the proper agencies. If you need some extra guidance to make sure paycheck withholdings are correct, refer to Abacus Payroll’s paycheck calculators, or consult with a payroll specialist.
Setting a Salary
When you decide on a salary for your employees, you have to consider current tax laws and exemptions. Are you going to pay your employees enough for overtime exemption? Will you limit their hours to ensure that overtime pay is not necessary? Developing a model that works even when the overtime laws adjust will save you much hassle in the future.
It’s also important to know how much an employee’s position is worth to your company and how much money it would cost you to not have them on board. Once you’ve determined that amount, you can begin to plan the salary.
Maybe you’re accustomed to writing everything down in an old-fashioned ledger or meticulously entering data into a spreadsheet. Such methods are completely reasonable for personal use but, like with bank accounts, your business will need to be a separation of private and public records.
The United States Equal Employment Opportunity Commission points out that you have to hold onto personnel records for at least a year unless you fire an employee, in which case you must keep their documents on file for an additional year. Payroll records, on the other hand, need to remain on file for at least three years. It is easy to see how you might confuse the two, but such a mistake will be costly if you get audited.
To avoid confusion or accidental termination of records, hire a payroll consultant. As long as you keep your agent up to date and informed of any payroll changes, you’re completely covered, and it’s one less thing on your plate.
Classification: Employee vs. Independent Contractor
The two types of staff classification fall under the headings of independent contractor and employee. The differences between the two can be minute or drastic depending on state law, but the most important difference for you to remember is the type of tax withholdings for which each qualifies. If you work with employees, you have to withhold income tax, Social Security and Medicare taxes, and unemployment tax from their wages.
Independent contractors, on the other hand, generally qualify as self-employed, and thus, do not require your help in filing their taxes. Whether you choose to work with employees or independent contractors, it is imperative that you establish their designations early on in the employment process.
Common Startup Mistakes
As always, small business owners are at a distinct disadvantage when it comes to experience-related issues in payroll—regardless of how prepared you are, there are always rookie mistakes that only experience can correct. While it’s unlikely that any two startups will have the same exact problems in their development, the following advice should give you some idea of what to avoid when you tackle your payroll for the first time:
- Keep your business account separate from your personal accounts. While you may view consolidation as an easy way to keep an eye on all your finances at once, the IRS tends to think differently. If you have no distinction between your personal assets and your startup’s finances, you run the risk of forfeiting both in the event of an audit. Even if it’s just a technicality, cover your bases and use a different account for your business.
- Don’t misclassify your employees. Even if you hire them on as independent and change their designation once your startup takes off, the IRS can penalize you if the employees’ job duties don’t change accordingly.
- Don’t overburden yourself with payroll responsibilities. You won’t be able to balance payroll, compliance, and all the fringe responsibilities thereof even as a full-time job, much less as an addition to your current responsibilities. Play it safe: hire a payroll consultant to keep track of your finances.
- Keep it simple. Nobody likes paperwork; your employees are no different. Make sure your system is concise, consistent, and online—no need for outdated tax forms and faxes. This is another area in which a payroll service will simplify your life—and your employees’ lives—drastically.
It isn’t hard to find yourself overwhelmed by the amount of processes and responsibilities that come with starting a business. Save yourself the time, money, and sanity—call Abacus Payroll today at 856-667-6225 and claim your free quote. You can also send us an email.