Creating a payroll system for an LLC may seem like a daunting task, but it can be broken down into small steps. Before hiring an employee, you need to prepare certain documents such as an Employer Identification Number (EIN) and an employee handbook. Once you have done all this, you can set up your payroll system. It’s best to consult an accountant or an employment lawyer to make sure you have a payroll system that meets the requirements of your industry and state law. Interested in how to set up payroll for LLC . Read our article and to find out more about payroll for LLC.
What Is an LLC?
An entity can register as a limited liability company regardless of its size. You can run a very modest enterprise or manage operations that span multiple states—either will be subject to the same set of rules as long as it holds the LLC status. What sets this type of structure apart from other formal bodies is their tax treatment. According to the IRS, the default classification of this entity type is that of a pass-through with some adjustments based on the management structure.
Most of the time, this means that LLCs won’t be required to report their income on a federal level unless they elect a corporate tax system. However, if a company chooses to hire employees, it automatically qualifies for so-called payroll taxes. More on what these regulations mean below.
Why Do You Need a Payroll System?
Any entity that employs workers who aren’t independent contractors or third-party service providers is subject to federal and local (state, county, city, etc) regulations regarding each paycheck as well as adjacent tax duties, wage garnishments, and various deductions.
To help prevent any violation of workers’ rights, government agencies conduct regular audits of various businesses’ established payrolls. This is why most enterprises choose to utilize payroll systems. In addition to streamlining regular payments related to their commercial activities, companies aim to present their payroll records in the most transparent and well-structured way possible when it’s time for a review.
These systems are also incredibly time-efficient as they allow you to automate recurring charges, manage payment information, and keep track of all operations made within the system. Choosing to rely on accounting software is a go-to payment plan for a great number of enterprises regardless of their primary industry. A lot of informal structures also use these systems in place of traditional means of financial management. What makes these systems so flexible is the versatility of their presets or modules that can be tailored to the internal structure of each company.
A popular alternative to this is working with a temp agency that provides workers and manages their payroll in your place. Another option is to use a PSP or payroll service provider who manages employee information, issues wages, and handles payment history. Service fees that go into hiring these agencies can be written off as deductible expenses.
How to Set Up Payroll for Your LLC
The key to organizing your payments, including workers’ compensation, is to research federal and state regulations, keep clear records of all activities, and maintain integrity as an employer. A good way to maintain your legitimacy is to work with a consultant who can help you outline the legal terms of managing an employment system. But let’s first look at the process itself and each step that goes into it.
1) Apply for a federal tax number
All entities that plan to hire workers must have an Employer Identification Number in place of an individual SSN. This ID is used by the IRS to track your entity’s financial activities and receive payroll taxes from entities that qualify for this duty. Failure to obtain a valid identification by a legal entity may lead to delinquency since certain taxes can only be paid using an EIN.
2) Obtain a local tax number (if applicable)
Certain jurisdictions also require employers to obtain a state tax number or another form of identification. You can learn about your state’s rules by contacting local representatives.
3) Gather and organize employee information
Employees and contractors must fill out specific forms prior to contributing to any specific enterprise. They usually contain the following:
- Legal name;
- Date of birth;
- SSN or EIN;
- Registered and/or factual address;
- Employment period;
- Terms of compensation.
Payroll workers typically use form W-4, while those filing for non-employment income have to fill out form 1099, though there are many subtypes to this application determined by the nature of your services or income. Additionally, all employees must submit form I-9 to prove they are qualified to work in the country.
4) Determine your payment schedule
Regular compensation must adhere to a specific time frame. You can choose to make your payments once a month, once every two weeks, once a week, or twice a week. Each of these schedules has its own merits, but their individual compatibility comes down to the specifics of your enterprise. The most popular form of payment is biweekly typically consisting of 26 paychecks. However, in certain jurisdictions, private enterprises have no choice but to issue payments on a weekly basis.
5) Estimate gross pay
Gross wages are payments assigned to workers prior to various deductions including tax and sans benefits. These are calculated based on the set hourly rate and the number of hours each employee has spent working in a scheduled period.
6) Estimate net pay
Net pay is the amount that remains of the gross pay after subtracting various withholdings, benefits, deductions, and allowances. These usually include federal, state and local taxes, FICA, retirement contributions, workers’ insurance, and more.
7) Pick a suitable system to issue payments
Although it’s technically possible to handle this the old-fashioned way—by balancing spreadsheets and books—most companies choose to either utilize accounting software specializing in payroll management or by hiring an agency. With the first option, you will likely need to pay subscription fees. The second option usually involves hourly service fees.
8) Record all transactions
The key to passing regular evaluations and doing right by your workers is to keep detailed and reliable records of every activity related to wages and other service payments. These records are essential for calculating net pay in relation to gross wages as well as paying payroll taxes. Most companies prefer digital bookkeeping with backup cloud storage, although some enterprises choose to have paper backups or keep their records entirely in paper form.
9) Follow tax requirements
Employers have a huge responsibility to the workers when it comes to paying their portion of payroll taxes. They must calculate and withhold the appropriate amount of applicable taxes (FICA, FUTA, SUTA, SUI, etc) from each paycheck and report it accurately on tax forms. New employees must also be reported to the IRS to factor in your future returns.