If you’ve ever hired an employee, considered hiring one, or been employed by someone else, you’ve probably come across the term “payroll.”
But as a business owner, you may be unsure of where to begin when it comes to the payroll process. Topics like how to do payroll and how to calculate payroll taxes can quickly feel overwhelming and intimidating, particularly if you’re hiring your first employee. And with so much information out there, it can be hard to figure out where to start.
This guide to the payroll process for retailers will walk through some of the most common questions, top payroll mistakes to avoid, and advice for getting started.
What is Payroll?
The answer might seem obvious, but payroll processes can actually get fairly confusing with all the different terminology and rules. Technically, “payroll”refers to two main things: the process for paying employees their wages while withholding and processing the appropriate taxes; and the financial records you keep about your employees’ wages or salaries (basically the information which shows up on a paycheck). The term can also be used to refer to the amount of money the company spends annually on employee earnings.
There are three key aspects to the process of “doing payroll:”
- Calculating the correct earnings for each employee (including things like overtime pay) and calculating the relevant taxes and other deductions (such as health care contributions) to be withheld from those earnings;
- Disbursing these payments to employees and setting aside the deducted amounts to be paid out to the appropriate recipients (tax agencies, health care, retirement funds, etc); and
- Recordkeeping for each individual employee and for the business overall.
Payroll can get complicated fast, which is why a lot of businesses either hire someone in-house, outsource their payroll activities to a payroll service provider, or to their external accountant or bookkeeper.
When Should Retailers Start Thinking About Payroll
It’s important to plan ahead to ensure that you have everything set up correctly when it comes to your payroll process. The best time to start planning how you want to handle payroll is at whatever point you decide you want to take on your first employee (even if they are a contractor or a part-time staff member).
It’s important to make sure you keep all the financial elements of your business organized and up to date. Doing payroll correctly will help you avoid serious issues including tax penalties and unhappy employees.
Although you don’t need to have everything figured out at the beginning, here are a few things that can be helpful when you first decide to hire and set up a payroll system:
- Company Structure: Are you planning to work exclusively with contractors or do you eventually want to bring on full-time staff members? Will your system support you as your structure expands and changes?
- Plans for Growth: How big do you want to grow? Will your system be able to scale with you?
- Location: Are all your employees located (or going to be located) in the same place? Do you want to grow to multiple locations and/or multiple states and countries? Do you intend to hire people who will work remotely? Will your system support the different tax and employment laws across locations?
Who Should be in Charge of the Payroll Process?
When you first start out, you may be wearing a lot of hats as a business owner — and payroll management might be one of the tasks you handle. But eventually, you‘ll want to delegate this work.
There are a few different options to help you handle the payroll process:
- In-House: You can hire someone in-house to manage payroll. Usually, this would be part of the finance team’s responsibilities (although they may work closely with HR in terms of record-keeping).
- External Bookkeeper or Accountant: Many entrepreneurs and small businesses will hire an external accountant and/or bookkeeper to help them with financial records and taxes. Many of these provide payroll services as part of their offering.
- External Payroll Service Provider: There are payroll management companies who offer outsourced payroll management services for businesses of all sizes.
Regardless of which option you choose, be aware that, as the employer, you’ll be considered responsible for anything that goes wrong. So it’s crucial to work with someone you trust and who is professionally qualified to do this work. Do your due diligence to make sure that anyone you bring on to help with your payroll process is up to date with all the relevant rules and regulations for your company’s location(s).
Whether you’re interviewing a potential in-house hire or speaking with an external professional, there are a few questions you should always ask:
- Past Experience: What is your previous experience working with other businesses similar to mine? (i.e. size, structure, etc).
- Reliability: Are you up to date on the latest payroll regulations for this year (federal, state/provincial, and local)? How do you make sure you (and your team) stay on top of this information? Do you (or your team) hold any official payroll certifications? Or related certifications like a CPA or CPB?
- Service Integration: Do you offer other related services, such as accounting, bookkeeping, tax preparation, etc? Are you able to work directly with my accountant and/or bookkeeper and give them easy access to necessary documents, accounts and other tools?
You should also obtain references from other clients or previous employers who can verify the potential hire or external professional’s experience and reliability. The IRS website offers some additional tips for protecting yourself if you choose to outsource to a third-party provider or external professional.
Even if you choose to run payroll yourself, you may want to work with a CPA to help you get your payroll system set up. It doesn’t have to be difficult to maintain, but you want to make sure it’s set up correctly at the outset.
How to Calculate Payroll Taxes
One of the more intimidating aspects of the payroll process is calculating payroll taxes. Each state and country will have different rules and regulations. In the U.S., for example, you’ll need to withhold part of each employee’s check to pay and report that amount to the IRS for FICA (Federal Insurance Contributions Act) and federal income taxes. FICA includes Social Security and Medicare.
Each employee’s withheld amount will vary based on a few factors, such as the individual employee’s taxable income, withholding rate and number of withholding allowances (which you can find out based on his or her W-4 form), and the current tax rates (which you can find in the IRS’s Publication 15, known as Circular E).
FURTHER READING: For more information on federal income tax withholding in the USA, visit the IRS website — they have a special information section for self-employed taxpayers and small businesses with under $10 million in assets.
Remember that, depending on your location, you’ll also have to factor in state and local/city income tax withholding and reporting requirements. That’s why it’s important to consult with a local specialist when you’re getting all of your systems in place to do payroll.
How Can I Automate My Payroll System?
If you’re doing payroll process in-house (or working with your bookkeeper or accountant), you can use accounting software to automate your process. Some of the small business accounting tools we recommend include:
- HR software platforms like Zenefits also offer payroll features.
How to Do Payroll: Tips to Set Retailers Up For Success
Get Your Employer Identification Number
if you are a U.S.-based business, make sure you get your Employer Identification Number (EIN) as soon as possible. This number is like a Social Security Number for your business and will allow you to report taxes and other relevant information to the IRS.
The EIN is sometimes referred to as an Employer Tax ID or SS-4. You may also need to do something similar for state and local/city authorities, so check your local regulations as well.
For retailers based in Canada, you’ll need to apply to the Canada Revenue Agency for a Business Number.
Know the Difference Between Contractors and Employees
Many retailers will work with a mix of employees and contractors. An individual’s employment status as a contractor, full-time employee, or part-time employee will affect not only their taxes (and your withholding and reporting obligations), but also whether they are eligible for benefits and other protections under employment law.
For example, typically a contractor would fill in a 1099 form rather than a W-4, and the employer would not withhold taxes from their pay as it is the contractor’s responsibility to pay self-employment tax. But of course, you’ll need to check your local regulations and laws.
Establish a System to Manage Compensation
Payroll management isn’t just about the wages or salary you pay to your staff. Other benefits, like health insurance premiums, retirement fund contributions, paid vacation, etc., can all impact how you run your payroll system and should be tracked and documented.
Get (and Keep) the Right Paperwork on File
Make sure you have all the relevant tax forms and paperwork from new hires. For instance, in the U.S., all new employees need to fill out a W-4 tax withholding form so that you can accurately calculate the paycheck withholding.
Additionally, it is legally required to keep a W-4 on file for all active employees and for three years after employment is terminated. You’ll also need copies of filed tax forms, W2s, and documentation for the tax payments (known as deposits) you make with your employees’ withheld earnings.
Keep Payroll Funds Separate From General Operating Funds
If possible, keep payroll funds separate from general business funds. It might seem like a hassle, but it will help you ensure that you keep track of everything you need to manage and don’t run into any issues with managing paychecks, deposits or taxes.
Select Pay Periods That Work for Your Business
Depending on where your business is located, you may have options for how frequently to pay your employees. If this is the case, choose the option that works best for your business’s cash flow and employee happiness.
If local regulations determine the pay period, make sure you are familiar with what those regulations require.
Stay on Top of Paperwork and Tax Deadlines
In the U.S., you’ll need to observe all deadlines for federal paperwork. For example, Jan. 31 is the deadline for giving tax forms to employees (typically this means W-2s to regular staff, 1099 to contractors). March 15th is usually the corporate tax deadline for federal taxes (but make sure you double check).
You’ll also want to be aware of state and local tax deadlines. Missing key deadlines could lead to costly tax penalties.
Moving Forward With Your Own Payroll Process
How have you found the process of setting up a payroll system for your retail business? Did you choose to take the process in-house, go with your accountant, or hire a payroll service? Let us know in the comments.