Step-by-Step Payroll Guide for Small Businesses

Step-by-Step Payroll Guide - Step Five: Have each employee fill out and sign IRS Form W-4

This form provides two critical pieces of information:

1. the employee's Social Security Number
2. the allowances the employee is claiming for income tax withholding purposes.

Remember...if at any time...your employees marry or divorce, have children, gain or lose a dependent or want to change withholding amounts for any other reasons, they will need to complete and sign a new W-4.

Also, you are required by law to treat an employee as a single person with no exemptions for withholding purposes, if you do not have an employee's W-4 on file.

So make very sure you have a W-4 in your business files for each of your employees.

Step-by-Step Payroll Guide - Step Six: Establish payroll records. For federal tax purposes, you must keep the following information on file:

• the name, address and Social Security Number of each employee
• the total amount and date of each payment
• the portion of each payment that constituted taxable wages
• copies of each employee's W-4
• copies of returns you filed
• copies of any undeliverable W-2 forms

Also most of your state and local governments require withholding too, so be sure you request a similar payroll tax publication from them (most have them online).

All states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming impose a personal income tax.

Some employees may ask you to withhold an extra amount. Have them put the extra amount they want withheld from each paycheck on line 6 in their W-4.

For most employees, you will be matching and withholding FICA tax.See this page for exact amounts and procedures for withholding Social Security and Medicare tax (FICA).

You report and pay Federal unemployment (FUTA) tax separately from Federal Income tax, and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Refer to Publication 15, Employer's Tax Guide (PDF) for more information on FUTA tax.

The taxable wage base varies from state to state with State Unemployment (SUTA) Tax so check with your state tax and revenue department for details.

Step-by-Step Payroll Guide - Step Eight: Check with your state department of labor to see if you are required to pay sick days, orientation time, etc. If it is not a requirement, decide if this is something you want to offer your employees. Also check your local overtime laws.

While you are checking out your labor laws, you may also want to check and see if your state has a special deal for small businesses who want to offer their employees health insurance. Oklahoma has such a program called: InsureOklahoma.

Step-by-Step Payroll Guide - Step Nine:Prepare and file payroll tax returns. The IRS requires that you file a quarterly Form 941, reconciling the amount of tax you owe and the amount you have paid.

This form is due by the end of April for the first quarter payroll taxes, end of July (2nd Q), end of October (3rdQ), and by the end of January for the fourth quarter payroll tax.

Most states have their own payroll tax forms due in the same month as the form 941s. Oklahoma's is an OW-9 (Oklahoma Employers Withholding Tax Return) and is due by the 20th of the month following the close of the quarter (April 20, July 20, Oct. 20, and Jan. 20).

Step-by-Step Payroll Guide - Step Ten: Prepare annual W-2 forms each January for all of your employees, showing how much they were paid and summarizing their withholding for the previous year. These forms are filed with the Social Security Administration and copies are sent to your employees.

Last of all, make sure you have a secure and private place to store payroll information. You will need a file for each employee, with records of all deductions and all pay calculations and payments. If you are audited, you will need to show these records, and they must be complete and accurate.

I know it sounds overwhelming; but, it is not if you have a very small basic payroll. It does not take long to do each step and the extra money you save by doing it yourself you can put towards building your small business.

However, if you are uncomfortable or unsure about doing it yourself, check with other small businesses in your area and find out what payroll service they use and would recommend.

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