One of the most difficult and complex accounting functions that small businesses face is their payroll. Because of the various state and Federal taxes that must be applied and the myriad government forms that must be prepared, the handling of a business payroll often causes accounting nightmares. Even if there is only one employee, there is a potential for problems.
First, let’s examine the basics. If your business is a corporation, all pay must be handled as payroll, even if you are the only employee. The corporation is a separate entity and the corporation itself will be the employer. You and any other people that you hire will be the employees. A business payroll entails a great deal of paperwork and has numerous government tax filing deadlines. You will be required to make payroll tax deposits, file various quarterly payroll tax returns, and make additional end-of-the-year reports.
Initially, you must take certain steps to set up your payroll and official status as an employer. The following information contains the instructions only for meeting Federal requirements. Please check with your particular state and local governments for information regarding any additional payroll tax, state unemployment insurance, or workers’ compensation requirements.
Setting up Your Payroll
1. The first step in becoming an employer is to file Internal Revenue Service Form SS-4: Application for Employer Identification Number. This will officially register your business with the Federal government as an employer.
2. Next, each employee must fill in an IRS Form W-4: Employee’s Withholding Allowance Certificate. This will provide you with the necessary information regarding withholding allowances to enable you to prepare your payroll.
3. You must then determine the gross salary or wage that each employee will earn. For each employee, complete an Employee Payroll Record and prepare a Quarterly Payroll Time Sheet.
4. You will then need to consult the tables in IRS Circular E: Employer’s Tax Guide. If your employees are paid on an hourly basis and the number of hours worked is different each pay period, you will have to perform these calculations for each pay period.
5. Before you pay your employee, you should open a separate business bank account for handling your business payroll tax deductions and payments. This will allow you to immediately deposit all taxes due into this separate account and help prevent the lack of sufficient money available when the taxes are due.
6. Next you will pay your employee and record the deduction information on the Employee Payroll Record.
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7. When you have completed paying all of your employees for the pay period, you will write a separate check for the total amount of all of your employees’ deductions and any employer’s share of taxes. You will then deposit this check into your business payroll tax bank account that you set up following the instructions above.
8. At the end of every month, you will need to transfer the information regarding employee deductions to your Payroll Depository Record and Annual Payroll Summary. Copies of these forms and instructions are included later in this chapter. You will then calculate your employer share of Social Security and Medicare taxes. Each month (or quarter if your tax liability is less than $2,500.00 per quarter), you will need to deposit the correct amount of taxes due to the Federal government. This is done either by making a monthly payment to your bank for the taxes due using IRS Form 8109: Federal Tax Deposit Coupon or by making the payment on a quarterly basis when you file IRS Form 941: Employer’s Quarterly Federal Tax Return. Copies of these forms are contained on the Forms-on-CD.
9. On a quarterly or annual basis, you will also need to make a tax payment for Federal Unemployment Tax (FUTA), using IRS Form 940 or IRS Form 940-EZ: Employer’s Annual Federal Unemployment (FUTA) Tax Return. This tax is solely the responsibility of the employer and is not deducted from the employee’s pay. Also on a quarterly basis, you will need to file IRS Form 941: Employer’s Quarterly Federal Tax Return. If you have made monthly deposits of your taxes due, there will be no quarterly taxes to pay, but you will still need to file these forms quarterly.
10. Finally, to complete your payroll, at the end of the year you must do the following:
• Prepare IRS Form W-2: Wage and Tax Statement for each employee
• File IRS Form W-3: Transmittal of Wage and Tax Statements
Remember that your state and local tax authorities will generally have additional requirements and taxes that will need to be paid. In many jurisdictions, these requirements are tailored after the Federal requirements and the procedures and due dates are similar.
© Nova Publishing Company, 2005