How to Do Payroll for Your Small Business

Tom
Tom May 2022 Content Creator 9 min

Table of contents

Does the thought of doing payroll yourself fill you with dread? All that number crunching, all those devastating mistakes you could make—it’s enough to make any small business owner want to throw money at the problem until it goes away. 

Before you dig into your business expense account a little deeper than you’d like to, hear us out: doing payroll yourself is a viable alternative to paying a professional. It takes planning, scheduling, and calculating, but the payoff from a self-managed payroll could leave your business  expenses account topped up for more important things. 

In our blog post on how to do payroll for your small business, we’ll break down everything you need to know about the process and walk you through it. We’ll also give advice on when it’s time to call a professional—because sometimes the workload is too much for the small business owner. 

How to do payroll for small business in a nutshell

  • Make sure your employees complete their W-4 forms accurately
  • Organise your Employer Identification number on the IRS website, or your steuernummer with the German service ELSTER
  • Decide on the frequency with which you will pay your employees and don’t forget to factor in bank holidays
  • Use a wage calculator to accurately determine the tax withheld from each employee
  • Keep all of your payroll records for a minimum of three years
  • Maintaining a consistent payroll system will avoid trouble for you in the future and ensure higher employee morale
  • Research payroll software heavily for one that best suits your business
  • Hire an accountant from a professional association if your business has grown and you can comfortably incur the cost

How to process payroll yourself

Before we offer advice on finding the right expert to handle your payroll, we’re first going to lay out how to do payroll for your small business. The daunting process will seem much simpler once it’s broken down into a series of steps.  

Have your employees complete a W-4 form

The IRS requires that all employees fill out a W-4 form that they hand to their employers. The form clarifies for you as the business owner how much tax should be withheld from that employee in their paycheck. Accurately completed W-4 forms will ensure no tax problems arise for you or your employees in the future. 

Changes to the W-4 forms

Major changes were made to the W-4 form in 2020. The IRS claimed that these changes were made to increase the accuracy and transparency of the payroll system. Any employees who have changed jobs since 2020 will have to submit a new form. If they haven’t, they do not need to submit new W-4 forms to their employers.

Once you have received correctly filled-out W-4 forms from your employees, you have the tax information you need to calculate payroll. 

Obtain your Employer Identification Number

Just as your employees must fill out W-4 forms, you as their employer must organise your Employer Identification Number (EIN). Your EIN is used by the IRS to identify you as a business identity. In Germany this would be your Steuernummer. The application process for your Steuernummer is similar to applying for your EIN.

The most popular and simple way to apply for your EIN is online via the IRS website. This process is a simple question and answer format, designed to be as straightforward and clear as possible. To answer all the questions accurately, you must have your Taxpayer Identification Number (TIN) as well as personal information (name, address, place/type of business activity etc.).

Choose your payroll schedule

One of the most important things you should establish before progressing with payroll calculation is establishing a schedule. When do you wish to pay your employees? And at what frequency? 

Weekly, monthly, and bi-weekly are the most common payment schedules most businesses adhere to. Bi-weekly is popular for small businesses on account of your employees not having to wait too long for a paycheck, but monthly may be better suited to you. Depending on when you balance your books and calculate expenses, you may wish to pay with less frequency. 

It’s also important that you factor in holidays: bank holidays, religious holidays, and labour days will all delay the payment process. Your employees may not appreciate waiting several days extra when pay day falls on a bank holiday, especially if you have student workers waiting for part-time wages every month.

Determine the frequency and date of your payments by assessing these factors and always thinking ahead. 

Calculate and withhold income taxes

Determining your employees’ income tax means understanding each individual employee’s situation. How much tax they pay is determined by many factors:

  • Marital status
  • Parental status
  • Private or public health insurance plan
  • Living situation (cohabitation with a partner/child)

To calculate this, it’s most convenient to use a wage calculator. With this, you can put in the employees’ earnings and above information and the income tax will be instantaneously calculated for you factoring in the obligatory insurances. In Germany, workers are divided into six tax classes which lay out the criteria for each taxpayer and how this affects their contributions.  

Keep payroll records and adjust to fix mistakes

You should hold onto almost all of your payroll records. You can offload records when the employee’s situation changes, e.g. when their pay increases or hours change, but you should keep the majority of payroll records for a minimum of three years. 

Keeping payroll records is important because federal and state laws require you as an employer to do so. While this in itself is obviously enough reason to hold onto them, even if it were legal to get rid of them, doing so would be a huge disservice to you. Should your business be audited, you would be entirely at a loss as to your earnings and would incur huge fines. Regularly review your payroll records to make sure all changes to employee situations have been accounted for.

The following are the documents and wage information that must be kept for a minimum of three years, in addition to employment tax records: 

  • Employer identification number (EIN)
  • Wage, annuity, and pension payments (amounts and dates)
  • Tips reported (amounts)
  • The fair market value of in-kind wages paid
  • Names, addresses, social security numbers, and occupations of employees and recipients
  • Employee copies of Form W-2 returned as undeliverable
  • Employment dates
  • Paid employees during sickness or injury
  • Employees’ and recipients’ income tax withholding certificates (Forms W-4, W-4P, W-4S, and W-4V)
  • Tax deposits made by you (dates)
  • Filed returns
  • Allocated tips
  • Fringe benefits provided

Pay payroll taxes

As an employer, you are required to pay what’s called payroll tax. This is a percentage deducted from your employee’s income which you then pay to the government. It is a tax based on wages, salaries, and tips paid to employees.

This contribution pays for things like public healthcare and social programs in the country in which you are an employer. If you are a self-employed worker without employees, you will have to pay both employee and employer contributions yourself. 

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Why do you need a payroll system?

Having a payroll system means solving a potentially disastrous problem for yourself—in advance. With an airtight payroll structure, you will be able to avoid later problems arising to do with employee wage miscalculations, late payments, and potential audit scenarios, all of which can sink your business financially or damage its reputation severely.

Maintain employee morale

Paid employees are happy employees, and happy employees are better workers. It’s as simple as that. On time and consistent compensation for your employees’ contributions to your business, with bank holidays factored in and delayed paydays avoided, will mean that your employees don’t have to worry about their own financial situations. One of the first things an employee will note about a place of work and employer is the fairness and responsibility with which they approach payroll. 

Upholding your company’s reputation

Your company reputation is an extension of employee morale. If you fail to keep your employees happy, word will spread about your incompetencies regarding payroll. This will make it more difficult to hire workers and to expand your business.

In addition, your financial reputation will suffer in the eyes of the tax authorities. Employees may raise concerns with unions, investigations may be made into your payroll processes. No business owner wants this, let alone a small business owner.  

Getting help with payroll

Despite having outlined above a way in which you can manage payroll yourself, there are times when it’s best to enlist the help of professionals and available services. If your company is growing at a large rate and hiring more employees with varying salaries, competent as you are, you may lose track of this crucial aspect of business financial management.

Approach enlisting professional help with a critical perspective. Learn first what you need it for and which type of assistance is best suited to you. 

Use a payroll service

Payroll software is not difficult to come by online. There are hundreds of programs, some generally suited to most businesses and others more specifically oriented. The best way to choose is by assessing your needs and your limitations as a business. Things to keep in mind when selecting payroll software are: 

  • Affordability
  • Number of payroll runs allowed
  • Regional limitations
  • Quality of support team
  • Simplicity of interface
  • Potential hidden fees
  • Integration capabilities

Hire an accountant

Bringing on a professional to help you with payroll is the ultimate way to put your mind at ease. Especially as your business grows and you hire more staff, payroll becomes more complex and demanding of your time. If you are comfortable with your earnings to hire a full-time accountant to handle payroll for your business, this may be the best way to go rather than trying to handle it yourself. 

When looking for the right accountant, check official websites for chartered accountants whose services and firms are well-reviewed. 

In case you will need your accountant for other responsibilities, consider getting an all-rounder, rather than one specifically suited to payroll management. 

You will also want your accountant to communicate with you when they notice weaknesses or areas in need of improvement in your business processes, so make sure you have an open communication and a good working relationship with the accountant you select. 

Conclusion

In this post, we’ve outlined the two methods for tackling payroll in your business: doing it yourself and hiring a service or professional. Ideally, you can see that while doing it yourself takes a good deal more effort and time, it is a viable and cost-effective solution to hiring an accountant. On the other hand, however, outsourcing your tasks to a professional can be the perfect solution when your business has reached a point that you no longer need to save money by doing it yourself.

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