New business owner? Congratulations! There are many responsibilities and exciting endeavors that come with starting your own venture.

One of those responsibilities is hiring. However, before you start posting job ads, you’ll first need to ensure you’re properly set up to pay the people that join your team.

Here’s what you need to tackle before you pay your first employee:

Prepare information required for payroll

Starting a business means there will be a lot of paperwork to get in order before opening day.

First things first. To be able to report taxes to the IRS and state agencies, you’ll need an Employer Identification Number (EIN) from the IRS. You’ll also need to get a state or local business ID. You’ll need to check with your local and state government officials to see if you’re required to have an additional tax ID number.

Finally, before onboarding any new hires, they’ll need to provide you with some essential information, including:

  • Their Social Security or Individual Taxpayer Identification Number
  • A completed I-9 form they’ve filled out to verify employee eligibility
  • A completed W-4 form they’ve filled out to ensure proper payroll processing

Be clear on employee classification

Many companies require different types of employees. You might have employees that work part-time, others that work full-time, and independent contractors as well. It’s extremely important to know the difference between types of employees in order to stay compliant as there are different rules and paperwork for each group.

The best way to ensure compliance is to consult an employment expert and use IRS Form SS-8, to help make the determination. One of the main differences between employees and independent contractors is the employer’s requirement to withhold and payroll taxes. Penalties can be severe for violations, so it is important to keep within the IRS guidelines on this.

The Fair Labor Standards Act (FLSA) also requires employers to distinguish between exempt and nonexempt employees. One of the biggest differences between the two is that nonexempt employees are entitled to overtime pay and exempt employees are not. Again, determining exemption status can be complex, so work with a qualified professional to assist.

Setup your payroll system

First, you’ll need to determine your period. Keep in mind that your state and local laws may limit your choices. Common pay periods are weekly, every other week (bi-weekly) or twice monthly (bimonthly). It’s important to consider what your employees may prefer. For instance, accounting departments often prefer twice monthly because it allows for 24 even periods, while every other week means 26 payments which doesn’t divide evenly into a year. Many employees would prefer their paychecks to be on the same day of the week.

Regardless of your decision, it’s important to be fully transparent and provide relevant details about the process to your employees. The details – such as how they’ll be paid (direct deposit or check) and deductions they must be aware of – should be included in your employee handbook.

Finally, consider how you’ll handle payroll. As your company grows, payroll can consume increasing amounts of time and energy to make the right calculations, issue checks or direct deposits, and ensure you remain compliant. Many companies choose to outsource their entire payroll function, which could be a valuable option for you to consider.

To learn more about if outsourcing payroll could be the right solution for you, check out our “Is Outsourcing Payroll Right for You?’’ eBook or reach out to one of our solutions experts to have a chat about your business needs.

This is just a brief outline of the many payroll responsibilities you’ll face as a business owner, so be sure to consult with qualified professionals to stay on top of all your obligations.

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