Small Business Payroll

Here's everything you need to know about processing payroll for a small business and where to obtain payroll services for your small business.

Performing the payroll service in-house.

Your business will need an employer identification number (EIN) to process its payroll. All withholding and payroll taxes are remitted to the Internal Revenue Service by using your EIN. You get an EIN for your small business by filling out Internal Revenue Service Form SS-4. After completing the SS-4, you can go to www.irs.gov and apply for your EIN online. Your business will get its number instantly. Or you can download the SS-4 Form from www.irs.gov and mail it to the Internal Revenue Service.

The next item on the agenda of the small business payroll is to ask your employees to fill out a W-4. This Form can be downloaded from the Internal Revenue Service website. Form W-4 is used when preparing your payroll to calculate Federal withholding taxes that will be deducted from your employee's gross pay. One other Form is required before you start writing payroll checks. Every business must complete Form I-9 (Obtained from the USCIS-http://www.uscis.gov/files/form/i-9.pdf ) for all new employees. Form I-9 helps employers ensure that their workforce is legally authorized to work in the United States. Keep this form on file in case Immigration agents visit your business.

Now you are ready to process your small business payroll and write payroll checks. Running a payroll requires calculating gross pay, deducting income, social security and Medicare taxes and writing the check to the employee for their net pay. The payroll process will not be completed until you send the withholding taxes to the Internal Revenue Service. Oh, by the way, you, the small business owner, must match and send to the Internal Revenue Service, the employee's social security and Medicare taxes. These are called payroll taxes and are fully deductible on your income tax return. To process your payroll manually, get Internal Revenue Service Publication 15 which tells you how much federal income, social security and Medicare tax to withhold. Calculate gross pay and use IRS Publication 15 to withhold the correct amount of federal income tax, social security tax and Medicare tax. Don't forget to deduct your State's withholding taxes.

All businesses are responsible for paying federal (See Form 940) and state unemployment tax. This is not a withholding tax. The employer pays this tax quarterly. Visit our page on Unemployment Tax and IRS Publication 15 for more information on this subject. After the business withholds the income, social security and Medicare taxes they must remit these taxes to the Internal Revenue Service. The best way to pay withholding and payroll taxes is through EFTPS, the IRS website for electronic payments. You must enroll to use EFTPS and get a separate user ID and password. You may also obtain IRS Form 8109 (Tax Deposit Coupon) and bring your withholding taxes to your bank.

Be mindful that withholding taxes must be deposited in accordance with the IRS depositing guidelines. If you are late paying, the Internal Revenue Service will add penalties and interest. See our page on Depositing Withholding and Payroll Taxes.

There are other IRS Forms you must prepare and send to IRS. Form 941 is a quarterly tax return that reports withholding, social security and Medicare taxes. See our page on Form 941. At year end, the employer must prepare and send Form W-2 to each employee and to the Social Security Administration. See our page on W-2. All of this amounts to a lot of work and is perhaps why many small businesses choose to outsource their payroll function or purchase payroll accounting software to at least automate the process.