State withholding and other local employment taxes vary depending on the state and you will need to contact your state governments to see if there are any taxes that need to be withheld and reported. Using a payroll service is the best way to safeguard yourself against these mistakes unless you have a meticulous system of review for your own payroll processing. Accessed May 22, 2020. In order to properly calculate what your payroll tax should be, you need to know the current tax rates. If you’re not sure how to do payroll yourself, use payroll software that reduces the risk of errors or fines. Make decisions on how and when to pay employees, including: You're not legally required to pay employees for holidays, vacations, or personal days, but most businesses do. It's doable if you take some basic steps, understand what you're getting into, and pay attention to detail. You might want to do it yourself rather than hire a third party, however, if you have only a couple of employees. And 12 states and the District of Columbia have passed legislation making paid sick time mandatory.. For specific advice, be sure to consult with a professional. Certain states may have longer retention requirements; be sure to check the specific requirements in your state. The Balance Small Business is part of the, Payroll Taxes & Employer Responsibilities, How to Set Up Payroll for Your Small Business. Add in your state's payroll tax dates for a complete calendar. Provide information about your employees, including the number of employees you have and how much you paid them over the quarter. Summary: Most expensive option but reliable. Step 1: Have all employees complete a W-4. Many business owners dread the thought of doing payroll because it can be a complex and exacting challenge. Step 3: Choose your payroll schedule. According to ADP, one of the largest payroll processors, the 5 most common payroll mistakes are misclassifying employees (independent contractor, exempt, non-exempt), inaccurate records, missing federal deposit deadlines, failing to report all taxable forms of compensation, and misprocessing garnishments. How often will you pay your employees—weekly, twice a month, every other week, or monthly? How Do I Process Payroll and Payroll Taxes? For example, the Social Security tax for 2020 is 6.2% and the Medicare tax rate is 1.45%. Below, we walk you step by step through what each way entails, as well as which option might be best for your business. Then, they'll specify how many allowances they want to take based on the credits they plan to claim. Payroll taxes are federal, state and local taxes withheld from an employee’s paycheck by the employer. Do I need a registered agent or can I be my own? You'll need this information for year-end payroll totals and reports. Federal income tax is withheld from employees’ gross wages and is based on earnings. By using The Balance Small Business, you accept our. Payroll taxes are federal, state and local taxes withheld from an employee’s paycheck by the employer. Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. Note that there is a new version of the Form W-4 for 2020, so this is the form you should have new hires fill out starting January 1, 2020. What Are Payroll Taxes and Who Pays Them? If you don’t want to learn how to do payroll yourself or use a payroll service, consider hiring an accountant. The payroll process includes three basic steps: Understand your legal responsibilities as an employer. Many payroll processing services, like Square Payroll, handle your payroll taxes, filings, new hire reporting for you, and allow you to complete payroll online. Contact the IRS and they'll assign one to you, or you can apply online or by fax.. She has written for The Balance on U.S. business law and taxes since 2008. This is effectively a Social Security number for businesses. If the word “payroll” makes you shudder, hopefully laying it out step by step will alleviate your pain. If outsourcing your payroll feels a bit risky to you, you can always hire an accountant to work in-house and process payroll for the company. Accessed May 22, 2020. Most payroll services calculate employee pay and taxes automatically and send your payroll taxes and filings to the IRS and your state’s tax department(s) for you. You'll also need this account for depositing funds you collected from employees for federal and state income tax and for Social Security and Medicare taxes (referred to as FICA taxes) and other amounts. Most online accounting systems these as part of their package of reports. If you are self-employed and don’t pay payroll taxes, you also may be unaffected. The four categories of payroll taxes are federal income tax, Medicare and Social Security taxes, federal unemployment tax, and state and local taxes. FUTA deposits are due quarterly. Certain states may have longer retention requirements; be sure to check the specific requirements in your state. "How to Set Up Payroll for Your Small Business." The IRS requires tax forms to be kept for three years. Note: This is not an exhaustive list of your responsibilities as an employer. For advice specific to your business, be sure to go over federal and state requirements or consult with a professional. Learn about the W-4, how it’s changing this year, and what your employees can do to make sure they’re withholding the right amount of tax from their paychecks. You'll use the gross pay amount to calculate withholding for federal, state, and any local income taxes. For each new employee you hire, you need to file a new hire report. You must make payments for federal unemployment tax on a regular basis in addition to federal withholding and Social Security/Medicare deduction payments. You must pay 7.65% and withhold 7.65% from your employee's pay.. 8. National Conference of State Legislatures.