To accomplish the end goal of getting your employees their money, you'll have to set up a payroll system. Setting up a payroll system requires that you get federal and sometimes state and local identification numbers, employee Social Security numbers and Form W-4s and that you establish a pay period.
For employers, the importance of correctly setting up a payroll system cannot be overstated. Devising a system for paying your employees that complies with federal and state laws is a necessity. So where do you start? The steps involved in setting up a successful payroll program are to obtain federal, and where necessary, state and local employer identification numbers, get employees' Social Security numbers and a completed Form W-4, and finally, establish a pay period.
Once you've taken these steps to set up your payroll system, you will then be ready to begin the process of paying your employees by determining the hours they've worked and figuring out their regular rate of pay, taking deductions from their pay, and finally, reaching the end goal of actually getting their earnings to your employees.
Employers have the option of using software or an outside payroll service to handle these administrative tasks. Software will save you some time by automating some of the process involved in payroll while an outside service will relieve most of the burden from your shoulders — for a price. Whether it's worth it in savings of time and effort is a decision only you can make.
Obtaining a federal employer identification number (EIN)
Employers must apply for and obtain a federal Employer Identification Number (EIN) from the Internal Revenue Service. The EIN is an employer's account number for the collection and reporting of taxes withheld and wages paid to the employees.
Your EIN will be a nine digit-number that takes the form: 12-3456789. It is assigned to sole proprietors, corporations, partnerships, estates, trusts, and other entities for filing and reporting purposes.
Partnerships, corporations, and trusts need an EIN, even if they have no employees. Sole proprietors generally need one if they have employees, have a Keogh pension plan, or must pay certain federal excise taxes.
Applying for an EIN. To get an EIN, complete and submit Form SS-4, Application for Employer Identification Number (EIN), to the IRS. We suggest that you do this before you open for business so that you will have it ready when the first taxes must be deposited. File only one Form SS-4, regardless of the number of businesses operated or trade names under which a business operates.
If you become the owner of an existing business, do not use the EIN of the former owner. If you already have an EIN, use that number. If you do not have one, apply for one using Form SS-4. There's an exception to this general rule: if you become the owner of a business by purchasing stock, use the business's EIN.
Household employers. Household employers are also required to complete Form SS-4 to get an EIN, even if your only employees are household employees (such as domestic workers like maids, nannies, or drivers) in your private home.
Tools to use
Among the Business Tools is Form SS-4. It is in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.
State and local identification numbers
In addition to the federal EIN you'll need to obtain, you may also need to secure identification numbers or account numbers from the various state and local taxing jurisdictions to which you will be reporting, depositing, and paying taxes.
In many states, the federal EIN is also used for state income tax reporting purposes.
You, the employer, must register for identification or account numbers for use in income tax reporting and in state unemployment tax and wage reporting.
Contact your state department of revenue to find out how to get a number as well as the procedure that you need to follow for reporting purposes.
Getting employees' social security numbers
You need your employees' Social Security numbers to set up your payroll system. You will also need to obtain a signed IRS Form W-4, Employee's Withholding Allowance Certificate, from each employee so that you know how many allowances an employee is claiming for purposes of federal and state withholding, and you can accurately withhold federal and state taxes from your employees' paychecks. You can get your employees' Social Security number from their information on the completed Form W-4.
You should give all new employees a Form W-4 to complete as soon as they come in for their first day of work, if not before. A good time to take care of this and other necessary paperwork is during employee orientation.
Employees should also complete a new W-4 if they get married or divorced, have a baby or gain (or lose) another dependent, or want to change their withholding amounts for any other reason.
On the Form W-4, the Employee Withholding Allowance Certificate portion will tell you how many allowances the employee is claiming. This number will determine how much you should withhold from employees' checks for payroll taxes.
Once you've got that information, but before you can determine how much to withhold and which withholding method is best, you must determine how often state law requires you to pay employees and establish a pay period.
How often must you pay employees?
While there are no federal laws that require you to pay employees at regular intervals, most state laws mandate that every employer must pay all wages due to employees on regular paydays designated in advance by the employer.
Many states also regulate how much of a holdback you can take. For example, if you pay employees every Friday for the work they performed through the preceding Friday, you're holding over pay for one week.
When must overtime be paid? The general rule under the federal wage and hours law is that overtime compensation earned in a particular workweek must be paid on the regular pay day for the period in which such workweek ends. If, for some reason, you're unable to determine the correct amount of overtime pay until after the regular pay period ends, you're required to pay the employee as soon after the regular pay period as is practicable.
Before you establish a pay period for your payroll program, consult our state map for the requirements in your state.
Establishing a pay period for your employees
A payroll period is the interval at which you pay your employees. It can be defined as the period of service for which a payment of wages is ordinarily made to an employee. The words "ordinarily" and "service" are key to this definition.
You have different options when it comes to deciding on pay intervals for employees. However, keep in mind that there are specific requirements you may be required to follow, including the state laws mandating how often you must pay employees.
Payroll period options
Payroll periods can be regular or miscellaneous. Regular payroll periods are daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually. These correspond to the methods for withholding federal income tax. A miscellaneous payroll period is any payroll period other than a regular one (for example, a payroll period of 10 days). Sundays and holidays are included in computing the number of days in such payroll period, after which the daily withholding table is used to compute the tax on the wage payments.
The payroll period you establish triggers the date and timing of payments that you owe the government because of taxes you collected.
Can there be more than one payroll period? An employee can have only one payroll period for wages paid by any one employer. If an employee is paid a regular wage for a weekly payroll period and, in addition, is paid supplemental wages (a bonus, for example) determined for a different period, the payroll period is still weekly. Your payroll period will be determined by actual pay practices, rather than by a declaration of a payroll period that conflicts with actual practice.
What if an employee doesn't work a whole pay period? The fact that an employee does not work an entire payroll period has no effect on the payroll period. This is true whether an employee starts work or is terminated during a payroll period.
Lois has an established weekly payroll period. She is usually paid $520. Lois is absent from work for three days during one week, resulting in actual earnings for that week of $208. The tax to withhold is computed based on a weekly payroll period for the amount actually earned — $208. It is not computed by finding the tax due on $520 and taking a percentage of that amount.
Handling occasional variations in payroll. If the payroll periods are all of uniform duration, there is no problem. If, however, there is an occasional variation, the payroll period and withholding requirements do not change. This is true even if that period does not coincide with the actual period for which a given payment is made.
Super Sightseeing Tours ordinarily pays its employees at the end of each week. When an employee was sent on a four-week trip, she was given a single paycheck for those four weeks when she returned. However, the payroll period is still weekly and, for withholding purposes, the payment must be treated as if it were four separate weekly wage payments.
Handling part-time employees' and temporary employees' pay periods. Answering the following questions will assist you in determining the payroll period of a part-time or temporary employee:
- How many days per week does the employee work? Part-time workers who regularly work less than five days per week must have withholding computed on a miscellaneous (daily) basis, even if the part-time worker is paid every week or on some other regular basis. However, an employee who works five or six days a week and is ordinarily paid at regular weekly intervals is considered to have a weekly payroll period. An exception to this rule is available if the worker has only one employer.
- Does the employee work for another employer? Many part-time employees have no other employment. Where these employees work less than five days a week, federal income tax withholding may be computed based on a weekly payroll period. However, for you to use this option, two conditions must first exist:
- You must be the only employer for whom the employee works during the week.
- The employee must give you a written statement that he is not working for any other employer and, if he begins working for another employer, he will notify you within 10 days after the additional employment begins. There is no particular form for this statement but it must contain or be verified by a declaration that it is made under penalties of perjury. If the employee notifies you that he is working for another employer, you must begin withholding based on a daily or miscellaneous payroll period as of the first payroll period ending, or the first payment of wages made without regard to a payroll period, within 30 days of receipt of the notice.
- Does the employee work more than 245 days a year? If a part-time employee works more than 245 days in the year in one or more terms of continuous employment with all employers, the employee may request federal income tax to be withheld according to the part-year employment method.