- Make sure you have a Federal Employer Identification Number (FEIN): All entity types including corporations, partnerships, limited liability companies, and sole proprietors must acquire a FEIN before hiring employees. The FEIN is used for tax filing and reporting purposes. You can apply for a FEIN online using the IRS’s online system at https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Understand your state and local payroll requirements: You must understand your state and local tax, in addition to withholding requirements. These requirements vary greatly from state to state. A great resource to find out your state’s requirements is www.payroll-taxes.com. Under the “State Tax” tab you simply select your state and it will bring up a summary page of your state’s requirements for payroll. It also includes information on any registration(s) you may need to complete to get up and running with State Unemployment Tax, State/Local Withholding, etc.
Know the employment record keeping requirements: There are multiple time requirements and types of required information for your payroll/employment records between the Department of Labor, Internal Revenue Service, and State. The longest time requirement is the IRS and is stated as “at least four years after filing the 4th quarter for the year.” So, if you keep all of your payroll records for at least 4 years then you are in compliance with the DOL and the IRS. Even though some of the information may have shorter time requirements it is much easier to use the longest time requirement so you won’t have to worry. For specific record types and time requirements visit the Department of Labor’s page at https://www.dol.gov/whd/regs/compliance/whdfs21.pdf and visit the Internal Revenue Service’s page at https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-recordkeeping.
Find a timekeeping solution that works for you: There are many options available for employers when it comes to timekeeping. From manual time sheets to fingerprint time clocks all the way to smart phone timekeeping apps. It’s essential to pick a solution that works best for your business. Accurate timekeeping can save employers a lot of time, money, and aggravation. First, it will save time when your payroll time is due if you won’t have to chase employees around to get their timesheet or verify the accuracy of their hours. Next, it will save you a lot of money if you are absolutely sure that all employees’ hours are accurate. Time theft can become very expensive over time. If you have a $20/hour employee that clocks in 10 minutes early and clocks out 10 minutes late every day, that equates to $33.33/week or $1,733.33/year in overpaid wages before any overtime is considered. If the extra time happens to put that employee into overtime hours, it only gets more expensive for the employer. Last, accurate timekeeping means that you are in compliance if the Department of Labor ever wants to audit your records. This will save you a lot of aggravation if it does come to an audit.
Choose a payroll period: It is best to choose the right payroll period for your business from the beginning because it can be difficult to change the payroll period once employees get used to the current one. Options include weekly, bi-weekly, semi-monthly, and monthly. Weekly and bi-weekly are the two most common pay periods. Weekly gives employees’ access to their earned wages soon after the actual time is worked and is what most employees prefer. Bi-weekly is less expensive than weekly for an employer, since you only need to run half the amount of payrolls each year and every payroll costs money to run whether it is with a payroll provider or paying an in-house employee’s wages to run it. There are pros and cons to all the different pay period types, and it’s important to choose what works best for your business.
Be prepared for on-boarding new hires: Hiring an employee comes with required paperwork which can be made much easier with preparation. Each new hire must fill out and sign a Form W-4 and a Form I-9. Some states have their own version of a Form W-4 for calculating state withholding. Also, it is required that the employer complete New Hire Reporting with their state, which can be done online with most states. Then, you have employer forms that need signed, such as Non-Compete/Non-Discloser forms, acknowledgment of receiving the Employee Handbook, Direct Deposit Authorization, etc. Last, an employer can decide to E-Verify all their new hires as an added step to verify an employee’s eligibility to work.
How will you process payroll: You have a few options to process your payrolls, here are some choices: you can run payrolls in-house using payroll software or you can outsource this function to a payroll service provider, PEO, or Employee Leasing. Outsourcing your payroll can be a very efficient option and can aid employers with running accurate payrolls and avoiding penalties. The cost of a payroll service provider is normally similar to the cost of paying an employee to run the payroll using payroll software when you include labor and software fees. A payroll service provider can also help you with the majority of the items on this list.
Continued compliance: An employer will need to continue compliance after the hiring process. This includes paying taxes timely, filing accurate tax returns on time, complying with withholding orders, responding to unemployment claims, etc. Staying compliant is very important and can save employers a lot of money over time, by not getting assessed large penalties or fines by the IRS, Department of Labor, State Agencies, and others.