It could be an exciting time for your business as it grows but it is important to consider all aspects of how this will affect your business. One area specifically is payroll withholding.
When you hire your first employee you are now legally required to hold a portion of that income for taxes and other deductions. The amount can change depending on income levels and state but the fact remains, that you must now begin properly calculating the necessary withholding and paying to the proper authorities on time.
When it comes to payroll withholding, what you need to know before making your first hire is going to be the following:
The process for withholding payroll
What is included in payroll withholding
What documents you should file
Let’s dive in.
An employer is responsible for withholding, reporting, and submitting income taxes and other deductions for their employees. Employees do get to decide how much they would like withheld in some cases (like for Income Tax), which is reported to the IRS by the employer. If employees choose to withhold too little, they will be the ones responsible for any underpayments.
To complete this process, you will need to consider the following steps.
Require employees to complete W-4s – Part of your HR onboarding process should be for employees to complete this form. As soon as payroll is due, you will need this information to properly withhold from their paycheck. (we recommend this be done annually as well to account for any changes)
Calculate withholdings for each paycheck and set aside – When the time comes to run payroll, you will refer to the W-4 form completed to calculate the amounts to be withheld.
Submit tax payments – Make tax payments on the appropriate due date for your business.
Keep good records – Be sure to keep organized and secure records of W-4 forms, paycheck stubs, payroll summaries, and tax payments.
There are payroll software programs that can help simplify some of these steps. Likewise, accountants can also help ease the burden of helping you run payroll and stay accountable for tax payments.
Payroll withholding includes specific taxes that all employees must pay. These include:
Social Security tax
Health care benefits
Other employee or employer-sponsored deductions
This can also include things like court-ordered withholdings for fines or fees needed to be paid, like child support.
As an employer, yes, you are legally required to engage in payroll withholding. However, employees may claim exemptions. If they have dependents then they can claim multiple exemptions. While this does limit the number of payroll withholdings for employees, this does not remove their tax liability at year-end.
Above we mentioned the importance of keeping good records. Not only is this going to be important come tax season but it is also a strong possibility these documents will be requested in the event of an audit. You may also need to substantiate these when applying for personal or business loans.
To expand on the documents listed above, it is also recommended you keep the following:
Forms W-4 and W-2: W-4 forms should be completed during the hiring process and W-2 forms will be completed at the beginning of every year by your tax professional.
Forms 941 and 944: These are your annual and quarterly tax returns employers must complete.
Any applicable state tax forms
Any records detailing retirement account contributions
Any records of health care premiums
If you are unsure as to whether you should hold onto a form, it is best to be conservative and keep all documents. We recommend working with your bookkeeper or accountant running payroll to establish a process that keeps organized folders of all documentation.
This can appear like an exhaustive process for business owners. To help ease the stress we recommend working with payroll software that handles these calculations and makes running payroll easy.
Gusto – We are big fans of Gusto and its user-friendly interface. Not only does the application assist with consistent payroll but you will also be provided with tools for onboarding employees. Such as assistance with W-4 documentation.
Quickbooks Payroll, Paychex, Rippling, and ADP or other platforms as well, and are suitable for various business sizes and needs. Since they each provide a specialized benefit or differentiating factor from their competitors, it is important to seek advice from a professional before choosing your platform.
Most, if not all, of these options, allow business owners to integrate with their bookkeeping software and simplify syncing to ensure your reports are accurate.
As exciting as it is to be hiring your first employee, there are plenty of considerations you should be making first. Payroll withholding possibly being one of the most important. We know it is more expensive to bring on an employee than it is to hire a contractor but it can certainly be worth the benefits of expanding your team.
This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.