Before You Add an Employee to Payroll

Downloadable software allows you to handle payroll yourself, but for a lot of small businesses, outsourcing the job is the way to go

I own a small used-car dealership and I'm in need of an employee. I've searched online everywhere on how to add an employee to payroll. I don't have payroll for myself; I just pay estimated tax every quarter. Can you give me any advice or a Web site to start with? —J.M., Canton, Ohio

If you don't already have one, you should apply for a federal employer identification number (EIN) from the Internal Revenue Service. You'll also need to apply for a state withholding number for your business and a state unemployment rate and number. Information on these requirements is available for your state online at the Ohio Business Gateway. The site also answers many other questions about running a small business and provides useful links you might explore.

You should open a business bank account for your company where you will draw the operating funds that will cover your payroll, says Mike Haske, vice-president of sales and marketing at Paylocity, a payroll services provider based in Arlington Heights, Ill. Then you'll need to decide whether you want to handle payroll yourself or outsource the task. "There are many quality in-house applications available, and any one of them will do a good job of calculating taxes and providing accurate output reports for filing," Haske says.

If you're a do-it-yourselfer, purchase software online from a source that allows you a free trial period. Give yourself a chance to use the program, determine how difficult it is, and figure out whether it's right for your needs before you purchase the full package. Most payroll programs work with QuickBooks, the popular small business accounting software. Talk to an accountant or bookkeeper who works regularly with small businesses and can help answer your questions and set up the program to record details such as employee earnings and deductions. A professional can also help if you need a recommendation for a particular product.

Professional Help

If you don't want to bother with handling payroll yourself, you can hire a company to do it for you. You'd be responsible for sending them your employee identification information along with the hours your employee works every pay period, Haske says, and the company would handle the rest of the process, including withholding taxes, making direct deposits, or printing checks.

Outsourcing may not make sense if you have only one employee—although some third-party payroll services will work with small companies that have a staff of only one or two—but it wouldn't hurt to investigate the possibilities now. As your business grows and you add additional employees, at some point you're likely to outsource the task.

Along with taking a tedious job off your hands, hiring an outside payroll service takes the potential liability off of you for any penalties incurred with the federal or state government for late deposits, missed deposits, or inaccurate filings. "One of the biggest advantages to outsourcing payroll is the payroll provider assumes the liability and responsibility for filing accuracy and making all tax deposits on a timely basis on behalf of the employer," Haske says.

The IRS has a helpful site for small business owners that answers frequently asked questions in an accessible, straightforward manner. Several of the topics on that site relate to employee rules and regulations.

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