Preparing Your First Payroll
Steps necessary to process a successful first payrollThinking of processing your first payroll but unsure of what needs to be done? This guide is the first in our series and will summarize all of the steps necessary to register your business, comply with IRS, DOJ, and FLSA requirements for hiring, calculate a paycheck, deposit taxes, and report federal employment taxes. Future guides will explain each step in more detail.
Obtain an Employer Identification Number (EIN)
IRS Main Web Site
IRS Form SS-4IRS Form SS-4 InstructionsIRS Online EIN Application
More Information about Form SS-4
Collect The Right Paperwork From Your EmployeesThere are currently two forms required of all new employees, Form W-4, Employee's Withholding Allowance Certificate, and Form I-9, Employment Eligibility Verification. Form W-4: An employer must have each new employee complete and sign a Form W-4, documenting the employee's name and social security number. Form W-4 is also used to determine the employee's withholding status. Form I-9: The Immigration Reform and Control Act of 1986 (IRCA) requires all employers collect certain information on each worker's eligibility to be employed. Each employer must: 1. Verify the identification of a worker and their right to work in the United States through physical review of the worker's documents. 2. Attest that the employer has seen the required employment verification documents. 3. Maintain records of each worker's employment verification.
Blank Form W-4
Blank Form I-9More Information About Forms W-4 and I-9
Determine Federal Income Tax WithholdingThere are several acceptable methods of calculating a paycheck, but the two most commonly used are the wage-bracket method and the percentage method. Both result in nearly the same income tax withholding and only the wage-bracket method will be explained here. 1. Determine the amount of wages subject to income tax by reducing gross wages by any pre-tax deductions. 2. Using pages 39-58 from IRS Publication 15, find the table that corresponds to the employee's payroll period and filing status (from Form W-4). 3. Locate the wage-bracket that contains the employee's wages subject to Federal Income tax (amount from step #1). 4. Determine the amount to be witheld. 5. Add any additional withholding indicated on Form W-4. This amount is then withheld from the employee's gross wage.
IRS Publication 15More Information about Withholding Methods
Determine Federal Employment TaxesEmployment taxes fall into two categories - Employer only and Employer & Employee employment taxes. The employer tax is Federal Unemployment Tax (FUTA) and is generally calculated at an effective rate of 0.8% on the first $7,000 of annual wages per employee. This rate may be higher in some states. The Employer & Employee tax is often referred to as FICA, although it is comprised of two separate taxes - Social Security and Medicare. In 2007, both the ER & EE pay 6.2% on the first $97,500 in annual wages for Social Security and 1.45% on ALL wages for Medicare. The EE's portion is withheld from gross wages while the ER portion is paid as an employer tax.
More Information on Federal Employment Taxes
Depositing Payroll TaxesThe default deposit frequency for all new employers is monthly, which means all Federal withholding and employment taxes are due by the 15th of the month following payment. For example, taxes calculated on wages paid in June are due by July 15th. Deposits can be made at an authorized depository financial institution (bank) using Form 8109-B or electronically using the Electronic Federal Tax Payment System (EFTPS). All new employers are pre-enrolled in EFTPS and simply need to activate their pin to begin using this system. If you are not already enrolled, a link to EFTPS has been provided below.
More Information about Depositing Payroll Taxes
Reporting Payroll TaxesThe most common payroll tax reporting requirements include Form 941, Employer's QUARTERLY Federal Tax Return, Form 940, Employer's Annual Federal Unemployment Tax Return, and For W-2/W-3, Wage & Tax Statement. The later two forms are filed annually while Form 941 is filed quarterly and due by the last day of the month following the calendar quarter (i.e. April for the first quarter). If a business meets certain requirements and is notified in writing of this fact by the IRS, Form 944, Employer's ANNUAL Federal Tax return may be prepared in place of Form 941.
Note: Many Forms change each year. To find current forms and instructions I encourage you to visit www.irs.gov, select forms, and then locate the correct form year and number.
More Information on Reporting Payroll Taxes
- State employment agencies require employers to perform "New Hire Reporting" on a periodic basis. Each state has its own requirements, but the purpose of New Hire Reporting is to facilitate the identification and location of any individuals with child support orders. Once identified, the court will send the employer a garnishment order to be applied to the employee's wages.
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