Bringing on your first employee is new and exciting; however, there are steps you need to take to ensure you are properly setting up your payroll function. Improper processing of payroll can land you in a tricky situation with the IRS and state agencies, making it important to follow certain setup steps to promote an accurate and timely payroll function.
Step #1: Apply for an EIN
Most businesses should have an Employer Identification Number for their business; however, some sole proprietors and single-member LLCs choose to use their social security number. When it comes to processing payroll for the first time, you want to apply for an EIN that will be used to remit payroll taxes and issue year-end forms. This can be done in under an hour on the IRS website.
Step #2: Register with State Agencies
Just like you need to register with the IRS, you should also register with your respective state agencies. Keep in mind that the location of your employees will determine which states you need to register with. For example, if you are based out of Virginia, but your employee resides in South Carolina, you should register in both states.
Step #3: Determine Pay Schedule
After you register with the respective agencies, you will need to work out the specifics of your payroll, including how frequently you plan on paying employees. Common pay periods include weekly, bi-weekly, semi-monthly, and monthly. Analyzing your cash flow will help you determine the most favorable schedule. You don’t want to have a weekly payroll if your clients only pay you every other week.
Step #4: Consider Benefits
Another key consideration is the benefits you plan on offering your employees. This includes health insurance, retirement plans, and reimbursements. The benefits you offer should be laid out in an employee handbook to reduce the risk of confusion. These benefits must be reported a certain way on payroll forms, such as pre-tax or post-tax.
Step #5: Hire Employees
After you complete the previous four steps, you are ready to hire your first employees. Remember that you may want to include yourself on payroll to take advantage of a beneficial salary versus distribution allocation. Consider the areas you need help with in your business, then take to the job market to find the right talent.
Step #6: Obtain Employment Information
All employees you hire will need to fill out employment information that details the taxes they want withheld, benefits they would like to participate in, and their legal information, such as name, social security number, and address. You must obtain a valid social security number before paying your employees.
Step #7: Process Your First Payroll
Once all of these steps are completed, it’s time to process your first payroll. Be sure you double check everything before you submit your payroll including that you have the correct information about your employees, the proper taxes are withheld, and you understand how to remit employment taxes to the respective agencies.
Summary Processing your first payroll doesn’t have to be an overwhelming task. In fact, working with the experts at Gordian Financial makes hiring your first few employees a breeze. We have the capabilities to process your payroll for you on a schedule that you choose, ensuring the proper taxes are withheld and remitted timely. Reach out to a team member today to learn more.
