What Small Businesses Need to Know About Payroll

by Kelly Clay

Payroll is more than just having enough cash to pay your employees on time. There's other things you need to know — like how employees should be classified, the forms you'll need and what they are, withholding taxes, and how to address things like reimbursement and expenses.

Is your business finally profitable enough to hire your first employee or two? While you may be familiar with contractors, hiring an employee requires a lot more legal legwork than just filling out a W-9 form. You'll want to be sure you understand the ins and outs of payroll before you bring your first full or part-time employee onboard to ensure they're paid the right way.


Employees are classified — by federal and state laws — as either exempt, non-exempt, or as contractors. Non-exempt employees are eligible for minimum wage and overtime, but exempt employees do not qualify for overtime. In some cases, they don't qualify for minimum wage, either. But in order to be classified as exempt, employees need to meet very specific legal requirements. Before you begin paying them, make sure you are correctly classifying your employees. If you classify an employee incorrectly, they can miss out on certain benefits like overtime, unemployment insurance, and family and medical leave. Make sure you understand the difference between an independent contractor and an employee.

New Hire Procedures and Taxes

As soon as your new employee is hired, you're required to perform new hire reporting with your state agency, which means submitting basic employer and employee information to them. The agency must confirm that the employee is legally allowed to work in the country, as well as provide the necessary tax forms — including a W-4 for federal income tax withholding and the state's tax-withholding form. If there's any confusion, review the Employer's Tax Guide from the IRS[1].


Payroll is more than about issuing a paycheck. Before you set up payroll, be sure you know what type of wages your employee is legally entitled to, and what wages you'll be paying them. Do they include commission and bonuses? What about vacation, sick days, and other kinds of personal days? You also need to be aware of federal and state laws concerning not just minimum wage and classification, but paid breaks and overtime. Understand what your employees are legally entitled to, and decide what you'll be providing in addition.


You'll need to know how to calculate mandatory deductions when you're setting up your payroll. These deductions include federal, state, and local taxes, as well as state disability insurance and wage garnishment. If you are offering your employees health and life insurance, retirement contributions, or other kinds of benefits, you'll have to make those deductions as well.


Payroll requires a lot of attention to minute detail, so consider hiring an accountant or a third-party accounting company to manage your books. Not only will a good accountant keep track of these details for you, but they can also make sure you're following all necessary payroll laws and help keep track of the many tax deductions available to small business. If you decide to take on accounting yourself, there are plenty of online platforms that small businesses use to manage payroll and report taxes to the government. But whether you decide to outsource accounting or keep it in-house, understand that you are responsible for reporting — and paying — all payroll taxes.

About This Author

Kelly Clay

Kelly Clay is a freelance writer from Seattle with a focus on social media and technology trends. Her work has been featured on Forbes, VentureBeat, WearableWorldNews, LockerGnome, and TechNewsDaily.


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Important Legal Disclosures and Information

  1. https://www.irs.gov/publications/p15/index.html

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