Expanding the scale of operations often goes hand in hand with employing more people. As exciting as the process of expansion often is, hiring employees comes with its own responsibilities. The employees must be paid correctly and all the required taxes must be withheld and then deposited appropriately. Records have to be maintained in specific formats as well. Hence it is important to have a sound payroll system in place. Let us take a look at the steps involved in setting up such a system:
Hiring of employees or contractors
First make the differentiation between hiring employees and hiring contractors. Hiring contractors or outsourcing your work helps you engage with expert workers who are not employed by you. This can save many tax obligations on your part. Thus, make this decision wisely.
Tax obligations for employees
All hired employees must be made to fill out the W-4 form. This is to make sure that the right amount of federal Income taxes, State Income taxes and payroll taxes are withheld from their pay. These taxes are then deposited with the proper authorities. You have to issue Form W-2 to all your employees in January for tax purposes.
Setting up a Payroll system
Every organization must either rely on Payroll software or outsource payroll responsibilities. This is because you need a system that can schedule the payments to the employees, withholding of taxes in a timely manner, issuing of paychecks and depositing of the taxes with the proper authorities on time. You will also need to have an Employer Identification Number from the IRS. This must be obtained by registration with the IRS. You can do it in-house as well if you have a big enough team to dedicate to payroll.
Federal, state and other payroll taxes must be withheld and deposited as specified by the agencies. Thus you need to withhold a part of every employee’s pay towards income tax, Medicare and other taxes.
- Federal Income tax is deducted based on the W-4 form that you make every employee fill. You need to deduct this from every paycheck that you give to the employee.
- Medicare and Social Security are taxes that are withheld by you as per statutory guidelines. The employer needs to make a contribution for both of these as well.
- Additional Medicare taxes: This is a new tax requirement since 2013 valid only for employees earning over $200,000 where the company is supposed to hold back 0.9%.
- Federal and State Unemployment taxes: This varies from 0.6% to 6%. If the employer has previously contributed to the state unemployment fund, then it is lower. The rate is applicable to the first $7,000 of each employee’s yearly salaries.
- Other taxes: There are some voluntary taxes that can be deducted only after the approval of the employee for the deduction. Examples of these taxes are Health insurance premium, Retirement plan contributions, Life insurance premiums etc.
- Make your federal tax deposits and file quarterly payroll tax return
- File annual return of Withheld Federal Income Tax along with annual federal unemployment tax return
Keep all W-4s in record for all your current employees. You should maintain these records for 4 years even after the employees have left the company. Also ensure that records of all W-2s are kept on file along with details of all tax deposits, dates and amounts. Keep them for a minimum of 4 years.
In summary, considering the above it is important to understand that as an employer, payroll is a huge responsibility for your organization. Whether you have an in-house team or outsource the work, it is important to be aware of your payroll responsibilities to avoid treading into hot waters later.