As a new business owner, hiring your first employees is an exciting milestone, but it also brings a new set of responsibilities. Before you can start issuing paychecks, you’ll need to establish the right tax accounts, collect required employee information, understand worker classifications, and set up a reliable payroll process. Taking the time to get these details right from the start can help you stay compliant, avoid costly mistakes, and build a strong foundation as your team grows.
Prepare information
Hiring employees often means significant paperwork. To get started, you must obtain an Employer Identification Number from the IRS. You will use it to report taxes to the IRS and state agencies. Next, you will need to obtain a state or local business ID (if necessary). Contact local and state government officials to see whether you need an additional tax ID number.
Lastly, you will need to obtain essential information from each new hire. You’ll need a Social Security number or an Individual Taxpayer Identification Number. Make sure each employee fills out Form I-9 to verify employee eligibility. For proper payroll processing, each employee will have to fill out Form W-4 as well.
Keep an eye on classification
Of course, like many companies, you may have a mix of staff employees and independent contractors. You can’t blur the line between them, and you need to be aware of the different rules and paperwork for each group. Consult an employment expert and work with IRS Form SS-8, which can help you decide on their classification. One of the biggest differences between an employee and an independent contractor is the employer’s requirement to withhold and pay payroll taxes. If you make a mistake here, the penalties can be severe.
The Fair Labor Standards Act also requires employers to make a distinction between employees who are subject to its provisions and those who are not (e.g., exempt vs. nonexempt employees). One of the key differences is that nonexempt employees are entitled to overtime pay and exempt employees are not. Again, the distinction can be complex, so working with a qualified expert can save you considerable headache.
Set up the system
First, consider a pay period. Weekly, every other week, and twice monthly are common options, though state and local laws may limit your choices. Also consider what your employees might want. For example, accounting departments often like twice monthly because it means 24 even periods, while every other week means 26 payments—it doesn’t divide evenly into a year. But employees often like their paychecks on the same day of the week.
Whatever you do, be transparent. Share important details about the process with your employees such as how they’ll be paid—check or direct deposit—and any deductions they should know about. Add these details to your employee handbook.
Finally, consider how you’ll handle payroll. Once you get more than an employee or two, it will start taking up increasing amounts of your time and energy to make the right calculations and issuing the checks or direct deposits. That’s why many companies choose to outsource the entire payroll function. If you do choose to do that, make sure the provider you hire can meet your business’s particular needs.
Final thoughts
This is just an overview of the many payroll obligations you will face. If you have questions about payroll for your new business, our Business Tax and Advisory team is here to help. Contact us to learn more.
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