Lumiere's Guide to Implementing Payroll
Things to consider before you make your first hire.
Congratulations! Your business is growing and you’ve decided to hire your first employee. You have found the perfect person and agreed on compensation but where do you go from there?
You must now tackle onboarding, establishing benefits, becoming compliant, and configuring and running a payroll platform. This may sound overwhelming, but don’t worry, we’re here to help. In this guide, Lumiere will step you through our process for hiring your first employee so that, right from day one, they’ll be ready to contribute to your business’ success.
Here is our guide to getting started.
1. File for Your EIN (Employer Identification Number)
Your EIN is also known as your Employer Tax ID, and you’ll use this for filing your employment and other taxes with state and federal governments. Before applying for a federal employer identification number (EIN) you should have already formed an entity. Most business owners elect to establish a structure beyond a sole-proprietor to establish liability protection. The most common corporate entity types for small businesses are S Corporations and LLCs:
S Corp
An S Corporation (“S Corp”) is a popular choice for many businesses because profits, losses and other tax items pass through the corporation to the shareholders. Although they can be more complicated legally, they can provide significant tax savings. S Corp owners who perform more than minor services for the organization are required to be reasonably compensated as employees as well as owners.
LLC
A Limited Liability Corporation (“LLC”) is a lightweight alternative to incorporating your business and is similar to an S Corp as it provides the pass-through benefits of the S Corp entity. LLCs are generally less complicated legally with fewer state-imposed annual compliance requirements.
See also the U.S. Small Business Association Guide to Business Structures
After you determine your corporate identity, you’ll need to apply for an EIN directly through the IRS. (Note: sole proprietorships do not need a EIN, but partnerships do). The IRS also has an helpful guide to Establishing Your EIN.
Check which EIN state requirements are applicable to you. While you are at it, you should also Enroll in EFTPS to see what payments your payroll company is making on your behalf
2. Register With the Relevant State Departments
You will need to register your company with the compliance department for every state you employee people in. Some states can have up to three departments that handle compliance with state tax collection, unemployment, disability, etc..
In California, the Employment Development Department (EDD) handles both tax collection and labor and workforce laws like unemployment. To register as a new employer in California you will need to complete the following:
Enroll as a New User through e-Services for Business at the EDD site.
After you have enrolled, access your e-Services account to apply for an Employer Payroll Tax Account Number.
Complete the registration process. You will be asked for information about your business and its operations in California including your California Secretary of State number. You can search for it here.
The EDD may take up to 3 business days to complete processing.
3. Establish Insurance
Caring for your team by offering health, retirement and other benefits helps employees and their families stay healthy and financially secure. As a small business owner, there are a number of types of insurance you must have and a number you also should have.
Workers Comp - A state-regulated program that covers job-related injuries and illnesses including wage replacement if they’re unable to return to work. Premiums vary by industry and job classifications. Every state has its own set of workers’ compensation rules. See the National Federation of Independent Business (NFIB) summary of each state’s policy.
Disability Insurance - Provides short-term Disability Insurance (DI) and Paid Family Leave (PFL) wage replacement benefits to eligible workers who need time off work due to illness or injury, pregnancy, or childbirth or to care for a seriously ill family member or to bond with a new child. California provides this through the California State Disability (SDI) program.
Employment practices liability insurance (EPLI) - Provides coverage to employers against claims made by employees alleging discrimination, wrongful termination, harassment, or other employment-related issues.
4. Document Employees
To protect themselves from potential litigation and avoid confusion, companies should utilize Job Descriptions, Offer Letters, Employment Agreements and Employee Handbooks. These will help establish policies and details of the role, compensation, and other legal ramifications of the position when hiring an employee or contractor including:
Wage and hour including overtime
Leave including vacation, pregnancy, paid family leave, etc.
Harassment and discrimination
Fringe benefits (commuter, meals, etc.)
5. Collect and Maintain Employee Information
Maintaining accurate and up-to-date profiles for your employees is crucial. For each new hire, besides the basic name, date of birth and address, be sure you keep the following data available and secure:
Employment start date.
Compensation details in writing to prevent later disputes (including any changes to compensation or responsibilities).
An I-9 Form to verify employees’ eligibility for employment in the US, and the verification documents.
See Also Doing Business In California - A Guide for Employers
6. Classify Employees
You need to know if your employees are exempt or non-exempt from overtime pay, and if you will be withholding taxes or paying them as a independent contractor. The federal guidelines for exempt employees can be complicated, and mistakes can be expensive. Before you make this important staffing decision you need to fully understand both types of workers and the importance of classifying them correctly. Failing to do so could cost your business.
Here are some general guidelines:
If you are still unclear, complete IRS Form SS-8 and they’ll give you a final determination of the worker’s status. It could take 6 months for a decision, but it will give you peace of mind to continue running your business.
Check out Lumiere’s Guide - Employee vs Contractor, Exempt vs Non-exempt - Determining Worker Classification for more information.
7. Pick and Implement a Payroll Platform
Pick a platform that is scalable and meets your particular business needs. Payroll is no place to take shortcuts, the penalties and difficulties that come with errors and poor timing are too high.
Every platform handles general payroll management tasks (direct deposit, multiple wage rates, garnishment payments, PTO, etc.) Some other things to considering when selecting a payroll platform:
Employee self-enrollment: Will the solution allow your employees to provide their onboarding information, view pay stubs and pull tax forms on their own?
Integrations: Does the solution integrate directly with your accounting software, automatically coding to account and department?
Tax liability management: As an employer, you need to withhold, report and remit Federal Withholding, State Withholding, Local Withholding, Federal unemployment (FUTA), and State unemployment (SUTA). The IRS created a guide. One of the benefits of a payroll solution is they automatically file and remit your payroll tax liabilities for you.
You should also consider implementing a solution for the following
Tracking employee’s hours, PTO, and sick time
401K employee contributions or employer matching
Expense reimbursements, commissions, bonuses, etc.
There are dozens of options for payroll software, and selecting yours means finding the one with the features you need at a price that works. Lumiere has experience working with many of the top recommended platforms.
Finally - Address Backups and Disaster Recovery
Not only is it a best practice to have backups and copies of important records in the event of a disaster, the IRS requires you provide evidence to substantiate entries, deductions, and statements made on your tax returns. You must be able to prove certain elements of expenses to deduct them and for most businesses payroll is their largest expense. It is also important to have I-9 forms, W-2s, new hire forms, and copies of all your filed tax forms (Form 941, Form 940, and state tax forms) available.