woman runs payroll for her small business on a computer

Payroll Basics Every New Business Should Know

If you’re tasked with setting up payroll for a new company, there are many different things to consider. Before going on a hiring spree, a few things will need to be in place first; not just for taxes or legal compliance but also to ensure the confidence of job candidates that they will receive their paychecks.

In this article, we’ll walk you through some payroll basics you should know when laying the payroll foundation for your new business:

Determine a Payroll Schedule

The first thing to decide is your payroll schedule and how often you want to run payroll. This includes when paychecks are issued to employees as well as what constitutes a pay period. Paychecks are sent out weekly, bi-weekly or twice a month but there should be some buffer time of a few days between the end of a pay period and when paychecks are actually processed.

Establish Withholdings

Each new employee should have a W-4 on file, the form that determines what federal taxes and other withholdings are taken out of each paycheck. The completion of this form should happen during onboarding and can be updated whenever an employee has a significant life change, such as marriage or divorce, that affects their withholdings.

Social Security

Federal law states that the first $132,900 of an employee’s income is subject to a 6.2% of their income to a social security tax. The employer then pays another 6.2%. Anything earned over the maximum amount are exempt from additional social security taxes.

If you earned $150,000, you would still have to pay the social security tax on the first $132,900 but the remaining $17,100 would not be taxed at all for social security.

Medicare Taxes

Similarly, the first $200,000 of a taxpayer’s income is subject to withholdings of 1.45% for Medicare taxes. Unlike with social security, however, earnings above $200,000 are still taxed, at a rate of 1.54%. In either case, the company is responsible for paying 1.45% of all employee wages to Medicare.

So if you earned $210,000, the first $200,000 would be taxed 1.45% and the last $10,000 would be taxed at 1.54%.

Both Social Security and Medicare taxes are to be paid through the Electronic Federal Tax Payment System (EFTPS) in accordance with your deposit schedule. The IRS will inform you of your schedule based on your tax liability for the most recent lookback period, although quarterly, monthly and semi-weekly schedules are most common.

Federal Unemployment Tax

The Federal Unemployment Tax (FUTA) requires that employers pay 6% of all employee income each year – for the first $7,000 – to support unemployment compensation to those that have lost their job. This means that if you pay an employee $10,000 in January, 6% of the first $7,000 (or $420) is due but no more must be paid for the remainder of that year for that employee.

Be aware, though, that the law doesn’t require you to pay this tax until the value is at or above $500

Depending on your state unemployment contributions, however, you may be entitled to a maximum credit of 5.4%. If you are, then you are only required to pay 0.06% of your employees’ income each year toward FUTA contributions. Click here to learn more about the FUTA tax credit.

Employee Forms to Keep on File

Once you start onboarding new hires, there are several forms that you’ll want to keep stored and easily-accessible for your records:

  • The I-9 form is used to verify the identity and work status of all US employees.
  • All New Hire forms must be submitted to the state within 20 days of their start date
  • Form DL1-65 identifies each employee’s emergency contact information
  • Form SF-256 identifies employees who self-identify as disabled and helps the government improve how they support employees with disabilities in the workplace.

Now that you have a better understanding of what components go into first establishing your payroll schedule, how to capture and track withholdings, and important documents to keep on file with an employee, consider using an HR assistance tool like Workful to make the process of gathering and storing this information that much easier.