Preparing Payroll Before Hiring Employees

Congratulations — you're a business owner. Now it's time to get some help — employees.

But before you advertise for help, you need to get yourself up to speed with the entire process of paying your employees.

Here's what you need to do before tackling payroll:

Prepare information

Hiring employees means paperwork.

• Get an Employer Identification Number from the IRS. Use it to report taxes to the IRS and state agencies.
• Obtain a state or local business ID if necessary. Contact local and state government officials to see whether you need an additional tax ID number. In Arizona, that means www.AZTaxes.gov. You apply for both withholding and unemployment at the same time.
• Obtain essential information from each new hire. You'll need a Social Security number or an Individual Taxpayer Identification Number. Make sure you get each employee to fill out Form I-9 to verify employee eligibility. For proper payroll processing, each employee will have to fill out Form W-4 and in Arizona, an A-4 as well. Arizona also requires you to E-Verify.

Keep an eye on classification

Of course, like many companies, you may have a mix of staff employees and independent contractors. You can't blur the line between them, and you need to be aware of the different rules and paperwork for each group. Consult an employment expert and work with IRS Form SS-8, which can help you make a determination. One of the biggest differences between an employee and an independent contractor is the employer's requirement to withhold and pay payroll taxes. If you make a mistake here, the penalties can be severe.

The Fair Labor Standards Act also requires employers to make a distinction between employees who are subject to its provisions and those who are not, i.e., exempt and nonexempt employees.

One of the key differences is that nonexempt employees are entitled to overtime pay and exempt employees are not. Again, the distinction can be complex, so work with a qualified expert.

Set up the system

First, consider a pay period. Weekly, every other week, and twice monthly are common options. State and local laws may limit your choices. Also consider what your employees might want. For example, accounting departments often like twice monthly because it means 24 even periods, while every other week means 26 payments — it doesn't divide evenly into a year. But employees often like their paychecks on the same day of the week.

Whatever you do, be transparent.

Share important details about the process with employees: how they'll be paid — check or direct deposit — and any deductions they should know about. Add these details to your employee handbook.

Determine paid time off.

Arizona requires you to at a minimum accrue sick time for employees and have a way to notify them of their accrued time, their time used, and their balance. This can be a paid sick time plan or included within a PTO policy.

Finally, consider how you'll handle payroll.

Once you get more than an employee or two, it will start taking up increasing amounts of your time and energy to make the right calculations and issuing the checks or direct deposits. That's why many companies choose to outsource the entire payroll function. If you do choose to do that, make sure the provider you hire can meet your business's particular needs.

This is just an overview of the many payroll obligations you will face.

Be sure to work with qualified professionals to keep on top of all your responsibilities.

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