Managing payroll is often a significant responsibility for any shop. It can be tedious, time-consuming, and stressful. It is important to do it correctly to keep employees happy and ensure your business complies with local tax laws.
How to Manage Payroll: 7 Steps to Follow
Here are the seven steps you need to complete to set up and manage payroll:
1. Register for an Employer Identification Number (EIN)
You need an Employer Identification Number (EIN) to hire and pay employees. An EIN is a unique number and is the business version of a Social Security number. You can register for an EIN online or by submitting Form SS-4 via fax or mail.
2. Gather W-4 Forms from Employees
You must collect W-4 forms from each employee you hire. Each employee must submit a W-4 form before their first day on the job. This form allows you to withhold federal income tax correctly based on factors like marital status, dependents, other jobs or income, and deductions.
3. Set a Payroll Schedule
A payroll schedule refers to how often employees are paid. There is no federal law regulating how often payroll must be paid, but each state has its own law regarding the minimum frequency of payment. When choosing the best pay period for your shop, you should consider three factors: cost, time, and employee preferences and the logistics of accounting and payroll.
4. Decide How to Pay Employees
Common methods for paying employees include direct deposit or check. You can decide to offer only one option or allow your employees to choose their preferred payment method.
5. Calculate Gross Pay for Each Period
Gross pay is what employees earn before taxes and deductions are taken out. You can calculate gross pay for salaried employees by dividing their annual salary by the number of pay periods. For hourly employees, you can calculate their total hours worked in the period and multiply it by their hourly wage rate.
6. Withhold and Pay Taxes
Employment taxes must be withheld from employees in each pay period. The amount you withhold from each employee depends on how much they earn and the information on their W-4 form. These taxes include federal income tax and Social Security and Medicare taxes.
7. Submit Tax Forms and Send W-2s to Employees
Use Form 941 to submit your quarterly federal tax return. This form allows you to report income tax, Social Security, or Medicare taxes withheld from your employees and the employer’s share.
Tips for Managing Payroll
Now that you know how to set up and manage payroll, here are some key tips to make it easier to manage:
1. Share a Payroll Calendar
A payroll calendar is a general calendar that can be shared, outlining pay periods, pay dates, timecard due dates, payroll tasks, and holidays. This will help your employees understand when they will be paid and the period being paid for, as well as any potential delays or changes in pay dates.
2. Keep Employee and Payroll Records
As you hire help for your shop, you will create documents and records for each employee, including general information, tax forms, pre-employment records, time and attendance records, and payroll records. You should keep payroll records for three years and payroll tax records for four years.
3. Stay Informed About Tax Laws
You should stay informed about tax laws and requirements to ensure that you are timely filing and paying taxes and processing payroll according to federal and state laws. You can check federal tax websites, state tax websites, and tax centers for the latest information.
4. Hire a Payroll Manager
You may
Your payroll tasks may become bigger than the time and energy you can dedicate to them. In these cases, you might consider hiring a payroll manager. If you want to keep your business small but need to offload payroll tasks from your duties, this can be a shared role for an existing employee or a part-time freelance role. And if you want to expand your store and need more payroll support, you can hire a full-time payroll manager, an external accountant, or a payroll service.
5. Request Employee Feedback
Make payroll a two-way communication method. Instead of assuming that employees fully understand how payroll works (and that they are happy with it), explicitly ask for their feedback and questions. You can use the questions and feedback to create internal documents and FAQs explaining your payroll process and how it affects employees.
How to Choose a Payroll Management System
There are several ways you can manage your payroll: manual payroll / doing it yourself, payroll software, hiring an accountant (internal or external), payroll services. Each has potential benefits and drawbacks. Here’s what you need to know about each one.
1. Manual Payroll / Doing It Yourself
Manual payroll is a common option for those running a shop as a side hobby and for small shop owners who have no plans for growth and expansion. This system means you, the shop owner, gather all the documents manually, file taxes by phone or online, deposit amounts, and keep payroll and employment records.
2. Payroll Software
Payroll software is a solution that simplifies and automates the payroll process. You are still responsible for managing the data you input into the tool, but payroll software allows you to store tax documents, file and submit taxes, deposit amounts for employees, and more, so you don’t have to do it manually.
3. Hiring an Accountant (Internal or External)
You can hire an internal accountant or an external contractor to set up your accounts, monitor your finances, and manage your payroll. If you hire internally, this person can manage payroll manually or use payroll software – either option works. If you hire an external accountant, they will have their own processes and setups for managing client payrolls.
4. Payroll Services
Payroll services, or payroll management companies, are a way to delegate payroll management to a team of professionals. They calculate your payroll, file tax statements, deposit amounts for employees, process new hires, and more. Payroll services are ideal for medium and large shops due to the level of expertise and support they provide.
Choose the system that suits your store and the way you envision its future. With Shopify POS, you can have full visibility into your incoming revenue and manage all fixed, variable, and mixed expenses for your store – from the inventory you buy to the amount you spend on labor based on your employee scheduling. Just install one of the payroll management and team management apps from the Shopify store to take control of payroll and workforce scheduling and manage your labor costs today.
Additional research and content by Alexis Damen.
Leave a Reply