8 Steps to Pay Employees of Small Businesses

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Paying your staff may appear intuitively simple if you're new to recruiting. However, the rules and procedures associated with payroll make it more complicated than just moving funds and generating payslips.

Table Of Contents
 

 

Step One: Calculate How Much Your Employees Should Be Paid

One of the most significant business choices you can make as a small business owner is deciding how much to pay your staff. In addition to paying employees properly and competitively, you must evaluate your company's needs and minimum wage commitments.

To begin, establish how much you can afford to pay your employees, how much they are worth in the market, and how much remuneration they demand. You must also include merit raises, bonuses, commissions, and any other type of compensation.

After you've determined the average salary for each of your roles, you should begin implementing that compensation as soon as feasible. It's ideal to do this before you start recruiting so that no one is unhappy that their compensation has been adjusted.

Offering timesheets allows you to track staff hours. Management may keep track of when employees clock in and exit. You may also utilize a digital clock-in system that employees can use to come in and go.

The ideal approach is to adopt a computerized system, which will automatically keep track of how long a person has been working. This will prevent mistakes from causing problems with the payroll. It is possible, though, that an employee will fail to clock in.

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Step Two: Gather Necessary Employee Documents

This involves obtaining a federal EIN, also known as an employee identification number, which is provided by the IRS for tax management purposes.

It is critical to obtain employee identification numbers so that your organization can be identified in business filings. Fortunately, obtaining this number is simple, and there are no costs involved. All you have to do is follow the instructions on the IRS website.

You will also require your employees' Social Security numbers. Remember that you must seek an employee's SIN within three days of their first say as an employee, and if the individual lacks a SIN that is valid, you must demonstrate that you took reasonable steps to get it.

Within seven days after their start date, new workers must also submit a TD1, Personal Tax Credits Return Form so that you may establish how much federal tax must be withheld from their wages. Employees who do not fill out new forms may be fined $25 for each day the paperwork is late.

The penalty starts at $100 and escalates by $25 every day up to a maximum of $2,500. Using technology to automate this process will allow you to keep track of all documentation and guarantee that all needed papers are completed during onboarding.

If you intend to pay your staff by direct deposit, you must also obtain their banking information.

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Step Three: Determine How the Employees Are Classified

The employment status of an individual has a direct impact on what an employer must withhold from compensation. 

If you misclassify your workers as contractors and fail to make the necessary deductions or include their income in your provincial payroll tax totals, you might face large fines, interest, and legal expenses on top of the unpaid payroll deductions.

As a business owner, you must decide whether the individuals you hire should be considered contractors or employees in order to complete the proper paperwork and deduct taxes for any workers.

The IRS offers a guide to assist you to determine if your staff are independent contractors or employees. If you are unclear about which category to choose, you can file a form and request that the IRS make the decision for you.

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Step Four: How Often Should Employees Be Paid?

You must decide how frequently you will pay your personnel. Many organizations will choose to pay every two weeks, but this is dependent on your individual business requirements, including cash-flow cycles. Other paycheck frequency possibilities include weekly, semi-monthly, and monthly.

You should also consider a pay frequency that is appropriate for your staff. Employees living paycheck to paycheck, for example, might find it difficult to make ends meet when being paid monthly. It's also worth noting that not all jurisdictions allow for a monthly frequency.

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Step Five: Apply Employment Laws and Standards

You must follow your province's employment rules while setting up payroll for your small business. As you recruit additional individuals, accomplishing this becomes more difficult.

You must consider overtime restrictions, holiday pay rights, leave legislation, and other factors. Many firms will choose for a payroll system that allows them to automate their policies and business procedures, allowing them to worry less about errors or inaccuracies.

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Step Six: File Tax Deductions

You are obligated to pay taxes on behalf of your W-2 employees. You must distribute the part of the employee's paycheck that was withheld, giving it to the appropriate areas for your tax filings. Filing taxes with the IRS, your state's tax collection agency, and if appropriate your municipality's tax-collecting agency is essential. It should be noted that some taxes are exclusively paid by the employer.

 

Step Seven: Pay Into Employee Benefits

As well as some of it going to the government, some other parts of the withheld pay will go toward employee benefits, but this is dependent on the company. These employee benefits may include: 

  • Health insurance

  • Commuter benefits

  • Retirement

  • Health savings accounts

  • Flexible spending accounts

Make a deposit into the appropriate accounts on behalf of your employees if you provide any employee benefit programmes.

 

Step Eight: Keep Payroll Records Updated

It is critical to have accurate and well-organized payroll records. If there is ever a mismatch between an employee's net compensation and what they anticipated to get, you should be able to go to your records. It's also crucial to keep these documents on available for tax purposes, in case you need to engage with the IRS. Mistakes occur, and as long as they are corrected swiftly and honestly, you will recover rapidly.

Recordkeeping is also required for payroll taxes that must be paid on a regular basis. As long as you upload the data you used to cloud storage, most computerised methods of deduction, gross pay, and net pay computation produce automated records. After completing your payroll, make a separate duplicate of any spreadsheets you used.

You'll need to preserve mailing receipts and tangible ledgers that have been written for paper computations and paychecks delivered via postal mail. While each of these stages may take only a few seconds, the time accumulates as you manage these processes for several employees.

 

What Is the Best Payroll Solution?

Choosing the correct payroll processing system for your small business is crucial to accurately and effectively managing payroll.

Enterprise-level companies have in-house teams devoted to employee compensation. Small companies might not be able to afford a payroll specialist, they may also not have a lot of employees so find it hard to warrant the expense.

However, in most circumstances, even one-person enterprises are responsible for labor law compliance and tax withholding.

Payroll software is the most efficient way to pay employees in a small firm. It saves both money and time. Indeed, payroll software automates every stage of the thorough payroll process we just went over, including payment distribution.

 

Employee Payment Methods

The only thing left to do now that you know how to pay your staff is to start paying them. This can be accomplished by direct deposit or actual paychecks, with the direct deposit being the preferred method.

Direct deposit is advantageous since funds are put immediately into employee bank accounts. Many people prefer actual paychecks because they can cash them anytime they want. The employee has the option of using numerous bank accounts or keeping the checks.

Pay stubs should be provided to employees whenever they are paid. Pay stubs will indicate how much they worked and earned, as well as how much was deducted. This is useful for recordkeeping and offers them something to use when trying to substantiate their income for financing purposes.

people working in an office

Paying an Employee With a 1099

Simply pay a 1099 employee their gross compensation. In other words, continue with your regular payroll procedure but do not withhold their taxes.

Employees are not officially 1099 contractors. They are classified as independent contractors.

Independent contractors are personally liable for their own payroll taxes. They will file all of their state and federal taxes on their own. An independent contractor is defined as such if the person paying for the job has control over the ultimate product or outcome but not over how the work is performed.

If you're unclear whether someone is an independent contractor or employee, it's advisable to speak with legal counsel who can explain how federal labor regulations relate to your business. To avoid any litigation or legal concerns, you must ensure that you are paying your employees in accordance with the FLSA.

 

Summary

Figuring out payroll taxes and other deductions, reporting the correct amount of taxes, and submitting your end-of-year tax forms on time are all difficult tasks. Unfortunately, you do not have a lot of room for mistakes when it comes to paying your employees as accurate payroll processing is critical to your employees' livelihoods, as is the IRS's satisfaction with your company.

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8 Steps to Pay Employees of Small Businesses
Samantha Clark

A Warrington College of Business graduate, Samantha handles all client relations with our top-tier partners. Read More

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