You've got your grand business idea, and you're ready to take your corner of the world by storm!
Starting a new business is exciting, sometimes scary, and occasionally exhilarating. But amidst your excitement, the sensible part of your brain reminds you that you've got some things to take care of.
Payroll is one of those things—an important one, too.
Paying employees on time, paying the government on time, and budgeting for expenses are essential to running a small business. If you're here, you might be wondering how to successfully manage payroll for your LLC.
You're in the right place.
This article will walk you through exactly what you need to do to set up payroll to manage it yourself or outsource it to a payroll provider.
Either way, you need to set it up correctly the first time so you can focus on driving growth in your business.
How To Set Up Payroll for LLC: What if You Get it Wrong?
An ideal scenario when starting something is to set it up the right way the first time. It's not always possible, but planning for every outcome is essential to running a successful business.
Setting up payroll effectively will save future headaches.
When you get payroll wrong, you open yourself up to legal ramifications and employee upheaval.
- Misclassification of employees: By classifying an employee as an independent contractor rather than an employee, you could be subject to employment taxes and employee benefits penalties.
- Unlawful deductions: You may violate wage and hour laws if you deduct an employee's pay for cash shortages or damaged property.
- Failure to comply with tax laws: You could be fined and liable for interest and penalties for not withholding and remitting taxes from employee paychecks.
- Failing to provide required benefits: You may be violating employee benefits laws by failing to provide required benefits, such as health insurance or retirement plans.
From a reputational standpoint, if you fail to pay employees accurately and on time, they might not only leave their position, but they might sue you for breach of contract or wage and hour violations.
It's just not worth getting it wrong.
Can you set up and run payroll yourself? Of course. It will take longer, and you'll need expert advice, but you'll get there.
Naturally, we believe outsourcing your payroll needs is the safest, most cost-effective, and most convenient way to manage payroll.
What steps must you take when setting up payroll for your LLC?
- Obtain Necessary Tax IDs
- Classify Employees
- Withhold and Pay Taxes
- Provide Required Documents to Employees
- File Payroll Reports
1. Obtain Necessary Tax IDs
You'll need three things to ensure you're compliant when you set up your business.
- Obtain your Employer Identification Number (EIN) from the IRS. They use it to identify you. It's similar to a social security number for businesses rather than individuals. If you are starting a business, hiring employees, or filing certain business tax returns, you'll need an EIN. You can apply for an EIN online, by fax, or by mail.
- Register for state tax withholding. Withholding state taxes from employee paychecks covers state income taxes, Social Security taxes, and Medicare taxes (FICA).
- Register for unemployment insurance. Workers who become unemployed because of no fault of their own can benefit from unemployment insurance. The rules regarding unemployment insurance and workers' compensation for LLCs vary from state to state.
To complete these tasks efficiently, you should:
- Gather all necessary information and documents before beginning the application process.
- Carefully read and follow all instructions provided.
- Keep copies of all completed forms and documents for your records.
- Follow up with the appropriate agency if you don't receive a response within the time frame specified.
- Consider seeking the assistance of a tax professional if you have any questions or concerns.
2. Classify Employees
It's crucial to correctly classify your workers as either employees or independent contractors because this classification determines which tax forms you must file and how you will withhold and pay taxes.
Employees work for you, the employer, and are under your control. A hair salon technician is an employee if you provide their equipment, pay them a salary, and allow them to set their own schedule.
Employees are entitled to certain employment benefits, including minimum wage and overtime pay, unemployment insurance, and workers' compensation. In addition to federal, state, and Medicare taxes, you must withhold and pay taxes on your employees' behalf.
On the other hand, independent contractors are self-employed individuals you hire to perform specific tasks or services.
They're not subject to the same level of control and direction as employees and are not entitled to the same employment benefits.
Again, let's use the hair salon example: if the technician sets their own schedule, uses their own equipment, and gets paid per job, they're a contractor.
It is the responsibility of independent contractors to pay their own taxes, and they are not covered by unemployment insurance or workers' compensation.
Related: 1099 vs W2: 4 Tips for Classifying Workers Correctly
To correctly classify your employees, you should:
- Understand the differences between employees and independent contractors.
- Carefully review the job duties and responsibilities of each worker.
- Consider the level of control you have over how the work is performed.
- Consult with a tax professional or legal advisor if you are uncertain about how to classify a worker.
3. Withhold and Pay Taxes
As an employer, you are required to withhold federal income tax from your employees' paychecks based on the tax rate that applies to their income level and the number of exemptions they claim on their Form W-4.
You must also pay the employer's share of Social Security and Medicare taxes.
State tax withholding varies by state. Some states have their own income tax, while others do not. To determine your state's tax withholding requirements, contact your state's tax agency.
To accurately calculate and pay taxes, you should:
- Use payroll software to help you determine how much tax to withhold from your employees' paychecks.
- Maintain accurate records of all taxes withheld and payments made.
- Avoid penalties and interest by filing tax forms and paying taxes on time.
- Ensure you comply with applicable laws by reviewing your tax withholding and payment obligations periodically.
4. Provide Required Documents to Employees
To ensure your employees have access to important information about their pay and benefits, you'll need to provide the following:
- Form W-2, which summarizes an employee's wages and withholdings for a given year. To file their taxes, employees must receive it by the end of the year. You can mail a W-2 to the respective employee's address on file, or you can make the W-2 available electronically.
Related: What To Do About a Returned W-2 Form
You should also provide employees with other pay and benefits information, such as their hourly or salary rate, vacation policies, sick leave policies, and any other perks or benefits.
In addition to ensuring that employees know their rights and entitlements, providing this information can help prevent disputes or misunderstandings.
A clear line of communication with employees is also crucial. Being transparent and straightforward about pay and benefits will help your employees understand how they're calculated.
You want to foster trust and goodwill with employees. It might not save you if you make payroll errors, but if your employees know you have a good track record, they might be more forgiving.
5. File Payroll Reports
As well as staying on top of all things tax, you must file various reports regularly. As well as ensuring compliance with tax laws, they also assist in tracking the overall health of the economy.
A failure to file reports could result in fines and penalties.
If you fail to file Form 941 or Form 944 on time, you may be subject to a penalty of up to 25% of the unpaid taxes for each month or partial month your return is late.
Penalties can be even higher if you intentionally fail to file a payroll report.
Related: Employment Tax Compliance: 5 Actions You Need to Take Now
Common forms include:
- Form 941: Reports wages, taxes, and other information each quarter.
- Form 944: Smaller businesses with lower payroll tax liabilities use Form 944 instead of Form 941.
- Form 940: For reporting unemployment taxes.
- Form W-2: To report wages and taxes withheld for each employee.
- Form W-4: Used by employees to indicate their tax withholding status.
- Form I-9: Employers use this form to verify new hires' identity and eligibility for employment.
- Form 1099: Reports non-employee compensation, including independent contractor payments.
Other Things to Consider When Setting up Payroll for LLC
Following the steps above is a good starting point. To make your life easier and ensure you run payroll smoothly, there are a few more decisions to make.
- Employee benefits: Choose what benefits you'll offer your employees, such as health insurance and retirement plans, and how you'll fund and administer them.
- Time tracking: Use time sheets, time clocks, or a software system to track your employees' hours worked.
- Pay frequency: Decide whether you will pay your employees weekly, biweekly, or monthly.
- Payroll budget: Set a budget for payroll expenses, including salaries, benefits, taxes, and payroll provider fees.
- Data security: Use password-protected payroll software and secure data storage to protect employees' personal and financial information.
- State and local regulations: Research and comply with state and local laws regarding payroll, such as minimum wage laws.
- Record keeping: Keep accurate records of employee pay, tax withholdings, and government payments.
Choose a Payroll Provider
Payroll is enough to make anyone's head spin. It's a part of your business that's so crucial you might be wary of outsourcing it and knowing who to trust.
But with so many decisions to make, forms to file, and laws to keep up with, outsourcing payroll might be the best thing you do.
Choosing a payroll provider requires research and arming yourself with the right questions. Will you keep payroll in-house and invest in software?
Or completely outsource payroll to a third party? Both options have their merits.
The crux is that running payroll in-house is time and resource-intensive with no guarantee you'll get it right. We might be biased, but outsourcing solves those problems.
Here's a handy checklist for choosing your payroll partner: How to Choose a Payroll Service: 7-Step Evaluation Checklist.
How to Set up Payroll For LLC: Overwhelmed No More
You could set up and run payroll in-house and do it successfully.
But you're opening yourself up to long hours, wait times trying to reach government helplines and advice lines, human error, and a general strain on your resources.
Outsourcing payroll immediately takes a weight off your shoulders, especially when you outsource to a company that focuses on helping small business run payroll easily.
What do you get when you partner with ConnectPay?
- Hassle-free payroll processing
- Connections with local experts in 401ks, Workers' Comp, and tax compliance.
- A Connected Rep that always answers when you call
- And so much more!
There are two ways we can help immediately to get your business set up to succeed.1. Schedule a call with us, and let's identify potential gaps and opportunities in your payroll process.
2. Discover how we help our clients run payroll with The Connected Guide to Small Business Payroll.