So you’ve expanded your small business, you’ve hired a few people and are generating an inkling of revenue.
You need to put a payroll system in place, whether you have one employee or 50. Amazingly, the U.S. Census Bureau reports that about three-quarters of all U.S. business firms have no payroll. And most of these are small business owners like yourself.
How you put your payroll system together encompasses more than the wages you pay your first hires. A good payroll system will protect you from the wrath of the IRS and can also save you time and money. It can be a challenge, however.
As Kevin Busch of CFOToday tells Small Business Trends: “New regulations make it more confusing each year for small business owners to file the right reports in a timely way. It’s a good idea to have a tax professional help with these important filings.”
Make sure you consider the U.S. Census Bureau recommendations as a rule of thumb and not gospel truth. For example, the Bureau advises small businesses to limit payroll expenses to between 15 percent and 30 percent of gross income (earned revenue minus cost of goods).
The truth is that payroll varies significantly depending on your type of business.
“Retail and manufacturing payrolls can come in at around 30 percent, but payroll for many service industries can hit 50 percent or more,” Busch says. “The key is the need to understand how to manage payroll to enhance profitability.”
Here are payroll filings to keep in mind while doing your first year’s payroll.
1. File New Hire Reports On Time
Every small business that withholds income tax, Social Security tax or Medicare tax from its employees’ paychecks or pays its portion of Social Security or Medicare taxes must file a Form 941, The Employer’s Quarterly Federal Tax Return.
“Make sure you make the required deposits for the year,” Busch says. “You must have all new-hire reports filed in a timely fashion with all the proper government agencies.”
2. Make Sure Your W-2s Are Properly Filed
File a Form W-2 for each employee or independent contractor (including that nephew or other relative you hired) if your small business pays them an annual total of $600 or more (minus a withholding for income, social security, or Medicare taxes).
3. Don’t Underestimate Anything, Especially Form W-3
Tax Form W-3 is forwarded to the Social Security Administration. It shows total earnings, Medicare and Social Security wages, and withholdings for all employees on your payroll for a given year.
The Social Security Administration requires you to send it to them before the end of February.
“The W-3 is often confusing for small business owners,” Busch notes. “This may require you to hire an accountant to take care of this.”
4. Instruct Your Staff to Update Their W-4s
Employees complete a W-4 form so you know how much federal tax to withhold from their paycheck.
“Payroll compliance can be like dealing with a Hydra, that nine-headed monster of Greek myth,” Busch remarks. “Make sure you have up-to-date W-4s from all your employees, including any who left during the current year.”
5. Each Employee Must Be Authorized to Work in the U.S.
Federal law requires you to have every person you hire in the United States complete a Form I-9, the Employment Eligibility Verification. This is so you can confirm each employee’s identity, as well as verify that they are authorized to work in this country.
“The last thing you want is for a federal agency to identify a worker that is in the country illegally,” Busch says.
Payroll Stub Photo via Shutterstock
This article, “5 Payroll Filings That Will Keep Your Business in Tax Compliance” was first published on Small Business Trends