Payroll is one of the areas where small business owners have the least room for error. Missing a deadline, misclassifying a worker, or getting a withholding calculation wrong can lead to penalties, back taxes, and frustrated employees. Here’s what every small business owner should have a handle on.
Classify Workers Correctly
Employees and independent contractors are treated very differently for tax purposes. Misclassifying a worker, even unintentionally, can result in back taxes and penalties, so it’s worth confirming the correct classification before you bring someone on.
Register for the Right Tax Accounts
Before you run your first payroll, you’ll need an Employer Identification Number (EIN) along with state and, in some cases, local payroll tax registrations. Requirements vary depending on where your business and employees are located.
Withhold and Deposit Taxes on Time
Federal income tax, Social Security, and Medicare withholdings need to be calculated accurately and deposited on a schedule set by the IRS. Missing a deposit deadline, even by a day, can trigger penalties.
Understand Overtime and Minimum Wage Rules
Federal and state wage laws set minimum pay and overtime requirements that vary by location and, in some cases, by industry. Staying current on the rules that apply to your business helps you avoid costly compliance issues.
Keep Accurate Payroll Records
Hours worked, wages paid, tax withholdings, and benefits should all be documented and retained for several years. Good records protect you if a question ever comes up about a specific pay period.
File Payroll Tax Returns and Year-End Forms
Quarterly payroll tax filings and year-end forms like W-2s and 1099s have firm deadlines. Missing them can mean penalties on top of the tax owed, even if the underlying numbers are correct.
Consider Outsourcing
Payroll rules change frequently, and the margin for error is small. Many small business owners find it’s worth handing payroll processing to a professional so they can focus on running the business instead of tracking compliance deadlines.
Payroll compliance can feel like a lot to manage on top of everything else it takes to run a business. If you’d like help setting up payroll correctly or want us to handle it for you going forward, reach out to our team.