Running Payroll for a Small Business: How to Do It Right

Unless this happens to be your area of expertise, payroll processing can be complex for a small business. And even seasoned pros occasionally make mistakes, as laws and guidelines pertaining to payroll are complex and constantly changing.

To help you clarify the ins and outs of payroll, here’s a step-by-step guideline:

How to Best Run Payroll for Your Small Business

Set Up an EIN

This is your employer identification number, which you must set up with the Internal Revenue Service (IRS). If yours is a new business, you will need to apply for an EIN. You also need to check with state and local agencies for those tax ID numbers.

Collect Employee Tax Information.

After obtaining your EIN, collect relevant tax information from your employees. Each of them must complete a W-4 and an I-9 form. Contract and freelance workers must complete 1099s. You cannot process payroll without the information provided on these forms.

Set a Pay Schedule

There are four types of pay schedules: weekly, biweekly, semiweekly and monthly. All four have their pros and cons, so consider which works best for your employees.

Calculate Employees’ Gross Pay

To calculate gross pay, multiply the number of hours a person has worked in a pay period by their hourly rate. A spreadsheet and the right software help greatly in facilitating this process.

Determine Withholdings

This is one of the most important steps involved in correctly processing payroll.

• Exemptions and allowances are the same thing. They refer to how much money is taken out of a person’s paycheck during the year.  
• Deductions are specified by employees on their 1040-EZ forms. They are items deducted from a person’s income when they file their taxes.  
• In addition, factor in other withholdings. These may include federal taxes, Social Security, state taxes, local taxes, Medicare, 401(k) contributions, workers’ compensation contributions, or other benefits.

Calculate Employees’ Net Pay

After you tally deductions, allowances, and other taxes, subtract what will be withheld from each employee’s gross pay. This is their net pay: what you pay them at the end of each period. Create a pay stub for each person and track what you’re withholding.  

Maintain Accurate Records

Honest, organized payroll records are essential. You need to be able to reference them if there’s ever a discrepancy between an employee’s net pay and what they expected to receive. These records are also critical from a tax standpoint.

Withhold, Report, and Pay Payroll Taxes

Calculate payroll taxes, including income taxes, Social Security, and Medicare. You may also need to pay federal unemployment tax (FUTA), state unemployment tax or insurance (SUTA or SUI), and Federal Insurance Contributions Act (FICA) taxes.

Still Need Help Getting Payroll Right?

Do you need additional assistance with getting payroll right at your company? If so, turn to the experts at Key HR. We’re aligned with leading providers to help you meet all your payroll and other talent management needs, so you can focus on running your business. Contact us today to learn more.