Two Critical First Steps Before Setting Up Payroll For Your Small Business
Hiring employees for your small business can help lighten your workload. But it also creates the need to manage something you didn’t need to worry about when you were handling all aspects of your business by yourself:
Even if you have just one employee, you need to do payroll accurately and in compliance with all legal and regulatory responsibilities. If you don’t, you could incur costly penalties from the Internal Revenue Service.
Before you hire your first employee and put processes in place to handle payroll, make sure you pay attention to two important details.
- Register for an Employer Identification Number (EIN).
The IRS requires that you have one before you hire employees. You can apply for an EIN online at www.irs.gov or contact the IRS to establish one. Your EIN will be used for reporting taxes and other documents to the IRS. You’ll also need your EIN when reporting employee information to state agencies.
Also, check to determine whether or not you’ll need state or local ID numbers to process taxes.
- Know the difference between an employee and an independent contractor.
Laws and requirements are different for them when it comes to withholding and paying taxes and in how you conduct your working relationship.
A few key differences include:
- Generally, employers provide employees with all the equipment, supplies, software, and tools they need to perform their jobs. Independent contractors use those that they own.
- Employees typically have their work hours set by their employers, whereas independent contractors control their own work hours.
- With employees, you the employer will need to withhold income tax and Social Security and Medicare tax from their paychecks. You’ll also need to remit federal and state unemployment taxes. When hiring help, employees must complete IRS Form W-4 (Employee’s Withholding Allowance Certificate) so you can withhold the proper amount from their pay.
Conversely, independent contractors are responsible for directly remitting tax payments; you do not withhold taxes from their compensation. Ask them to complete IRS Form W-9 (Request for Taxpayer Identification Number and Certification), which certifies they are not employees.
- Independent contractors send you an invoice for services rendered.
After you have these key action items checked off your list, you can concentrate on other details such as deciding on a pay period and either choosing a payroll system or outsourcing your payroll administration.
For more information about payroll requirements, visit the Understanding Employment Taxes page of the IRS website. Also consider contacting your local SCORE chapter to get insight from a mentor who can point you to the right resources and guide you as you grow your business.
Chapter Chair/President, SCORE in Houston
Business Accelerators Can Grow Your Business.
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Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 10 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 11,000 volunteer business mentors in over 320 chapters serve their communities through entrepreneur education dedicated to the formation, growth and success of small businesses. For more information about starting or operating a small business, call 1-800-634-0245 for the SCORE chapter nearest you. Visit SCORE at www.score.org.