Becoming an entrepreneur is exciting. Take it from a guy like me who’s been in the game for decades. But, do you know what’s even more thrilling? Hiring employees. And, do you know what comes with hiring employees? That’s right: payroll.
Yes, hiring and adding employees to payroll can be exciting. After all, that means your business is growing. But, there are a few questions you need to ask yourself before you can begin paying your new hire. So, what kinds of questions should you ask? Luckily, I’ve come up with a list just for you. Here are six must-ask questions to think about when setting up payroll for a new hire.
1. Do I Have The Paperwork I Need To Run Payroll For The Employee?
When it comes to running payroll for employees, you can’t go far without gathering some paperwork first. To calculate and withhold taxes for your new hire, you need the following handy:
- Form W-4: Tells you how much to withhold from an employee’s gross wages for federal income tax.
- State W-4 form, if applicable: Determines employee’s state income tax withholding amount. Some states do not have state income tax and therefore, do not have a state W-4 form. States may use Form W-4 for state income tax withholding rather than having a state-specific form.
To run payroll, you may also need to collect additional forms, such as a direct deposit form or benefit forms.
So before you even try to enter your employee into your payroll, make sure to ask yourself if you have the proper new hire paperwork ready to go. If you don’t, contact your new hire ASAP so you can get the ball rolling (and ensure they get paid!).
2. What Will The Employee’s Pay Frequency Be?
Another question to ask yourself when setting up an employee in your payroll is what their payroll frequency will be. Weekly? Biweekly? Semimonthly? Monthly? There are so many options to choose from…
…But, you’ve gotta be careful. Before selecting a pay frequency for your new employee, brush up on pay frequency requirements by state. That way, you can ensure you’re paying employees at a legal frequency.
If you’re an experienced employer, you’ll have a good idea of how frequently you plan on paying an employee. For example, you may pay salaried employees biweekly and hourly employees weekly. But, it never hurts to know your pay frequency limits. A general rule of thumb is the more frequent, the better.
Whatever you do, make sure you’re following the law. And, give your new hire a heads up on how frequently they will be getting paid. Consider even providing employees a schedule so that they know when pay day will be.
3. Will They Be Hourly Or Salaried?
Will the employee be hourly or salaried? Exempt or nonexempt? These are questions you need to consider when adding an employee to your payroll.
If you have payroll software, adding this information may be as easy as clicking a button. But before you make any selections, know the differences between salary vs. hourly and exempt vs. nonexempt:
- Salary: Employee receives a set amount of compensation regardless of how many hours they work
- Hourly: Worker gets paid by the hour (e.g., $15 per hour)
- Exempt: Employee is not protected by the FLSA and does not receive overtime pay
- Nonexempt: Employee is protected by FLSA guidelines and can receive overtime
Many nonexempt workers receive hourly wages. However, some nonexempt employees can receive a salary.
After you determine if the worker is hourly or salaried and whether they’re nonexempt, record it in your payroll, along with their pay rate.
4. How Am I Going To Pay The Employee?
Part of running payroll also includes actually paying the employee (go figure!). And, there are a number of ways to do this. You can pay a new hire via:
- Direct deposit
- Pay cards
Obviously, direct deposit has taken the world by storm with 90% of employees being paid with it. But, that doesn’t mean you can’t do a mixture of methods at your business. If you decide to offer multiple ways to pay employees, make sure to find out which method your new hire prefers.
Also, do your due diligence to find out employee payment laws in your state (e.g., research pay card laws by state). Depending on where your business is located, you may not be able to force employees to use a certain method, like mandatory direct deposit.
If you plan on using direct deposit for your new hire, be sure to collect a direct deposit form from your employee (think back to Question #1). Include information such as bank name, accounting number, routing number, and account type. Consider also including multiple lines for additional bank information in case the employee would like to split their paycheck into various accounts.
5. What Taxes Do I Need to Withhold?
The last thing you want to do when paying employees is calculate payroll taxes incorrectly and withhold the wrong amount. So before you go withholding taxes all willy-nilly, make sure you ask yourself, “Which payroll taxes do I need to withhold?”
The taxes you withhold from employee paychecks can vary depending on a few factors, like location and employee information (e.g., W-4 details). You may need to withhold the following taxes:
- Social Security tax
- Medicare tax
- Federal income tax
- State income tax
- Local income tax
- State-specific taxes
Generally, you need to withhold Social Security, Medicare, and federal income taxes (unless the employee is exempt). If you’re unsure which taxes to withhold from your new hire’s paycheck, check with your state.
Use your new hire’s forms (e.g., Form W-4) to help calculate withholding amounts. If you use payroll software, you don’t have to worry about doing manual calculations. Instead, the software will do the math for you.
6. Does The Employee Have Any Additional Deductions?
Woah, woah, woah—there’s still one more question to ask yourself: Does my new hire have any additional deductions?
In addition to various payroll taxes, your new hire may have other deductions, such as:
If you offer voluntary deductions at your business, such as health insurance, make sure you account for them when running payroll for a new hire. Have new employees fill out deduction forms when you hire them. And, ask newly-hired workers if they have any specific deductions they need deducted from their paycheck (e.g., child support payments).
Keep in mind that some deductions are pre-tax while others can be post-tax. Again, you can use software to help streamline deductions and payroll (trust me, it really simplifies the process).