(BPT) - Even amidst the uncertainty of 2020, entrepreneurship managed to grow. Nearly 4.5 million business applications were filed-the highest on record for a single year, up 24% from 2019.[1] This surge in new business formation means many small business owners may soon be hiring employees for the first time, which is both exciting and nerve-racking for these entrepreneurs.
While there are many things to consider when hiring your first employee, understanding payroll is key. When you know the basics of the process, not only will you save time and trouble, you'll also be able to get back to what you love-your business-faster.
Can you afford payroll?
Stephanie Smith, a Block Advisors scholar and founder of Social by Steph, a digital advertising consultancy based in Atlanta, knew she needed to hire help if she wanted her business to grow. 'I was saying 'no' to business due to the volume of referrals coming in. Still, I was worried it would be a huge chunk of my revenue to start paying people to help manage the additional work. Once I finally hired help, I realized that I'm actually able to bring in more revenue by finding good people to delegate tasks to,' she said.
The first thing to consider before you make the leap from 'solopreneur' to employer is whether you can afford it. You'll need a strong understanding of your business's cash flow to determine how much you'll spend on employee wages and what you'll owe Uncle Sam in payroll taxes. Federal payroll taxes fall into three categories:
- Withholding taxes: Taxes employees pay on their income; employers are responsible for withholding the tax from employees' paychecks and depositing with the appropriate tax authorities.
- Employer taxes: Taxes employers pay entirely, which are typically based on a percentage of the business's payroll.
- Shared taxes: Taxes split between an employer and their employees (usually 50/50). The employer must withhold employees' shares from their paychecks and deposit, along with the employer portion due, to the IRS.
As if that's not complicated enough, you'll also pay taxes to the state and local governments that fall within each of the above categories.
The only exception is if you hire independent contractors, which is what Smith eventually did. You don't have to withhold or pay taxes for independent contractors as they are responsible for their own taxes, but you do have to collect a W-9 from them before they can start working for you. You may also need to report to the IRS and state that you paid nonemployee compensation to the independent contractor. And it's important to make sure they truly classify as an independent contractor, because the IRS is cracking down on employers who misclassify employees as independent contractors (hello, additional fees).
If you have any questions about your cash flow, employer readiness or how to classify your workers, Block Advisors is a small business partner that can help. 'Our team of small business certified tax pros will put a financial lens on your business, guiding you to the best outcomes,' said Paul Ramos, director of small business tax for H&R Block. 'We will propose opportunities to increase your cash flow and profitability by reducing expenses, while helping you understand fixed and variable costs, optimizing marketing spend and more. And we have the small business payroll services and support you need to stay compliant so you can focus on running your business.'
Do you have time to manage payroll?
Next, consider how you'll handle payroll.
Running payroll in-house means assuming the role of calculating and issuing paychecks, managing taxes (including filing all corresponding tax forms, managing reporting and payment schedules, and staying on top of any tax changes), and remaining compliant with all local, state, and federal laws. This can be both daunting and time-consuming. Even if you purchase software to assist with this function, you're still left doing the work and the homework, taking more time and increasing the likelihood of mistakes.
In fact, as Inc. recently reported, the IRS penalizes about one out of every three business owners for payroll errors. Penalties and interest will be assessed on your account if you fail to collect, report and remit payroll taxes. If you don't file a report on time, the penalty is 5% per month of unpaid tax up to a maximum of 25%. And the penalty for missing a payment deadline is even more severe and expensive.
If you don't feel comfortable handling payroll on your own (don't worry, you aren't alone!), look into payroll services that offer expert help.
Looking for expert help?
After considering the true cost of payroll and the time it takes to manage, determine what makes the most sense for your business. It can be a tough decision to outsource certain functions, but if you're spending more time on running payroll than on your core business, it's time to consider getting expert help.
'Give your payroll tasks to our team of payroll professionals,' said Ramos. 'We make the whole process easy, from paying your employees to filing quarterly federal and state tax filings and forms, along with running and distributing wage reports-for both employees (W-2s) and independent contractors (1099s)-as you wrap up the year.'
Block Advisors, a team within H&R Block, is dedicated to meeting the tax, bookkeeping and payroll needs of small business owners year-round. To start working with the experts at Block Advisors, visit blockadvisors.com.