Business Ownership 101: How to Pay Employees and Contractors

Millions of new businesses start each year, and if you’re one of them, congratulations!

Now that you’re set up with employees and contractors ready to go, the next thing to think about is how you’re actually going to pay them. Business accounting can be confusing, especially if you’re a new business, so it’s important to think about this early on in the process.

The last thing you want to do is not be able to pay when your workers are expecting it. Are you struggling to figure out how payday is going to work?

Keep reading to get the inside scoop on how to pay employees and contractors for your business.

Set Your Payroll Process Up

You first need to decide which type of payroll system you want to use. There are a lot of payroll tolls to make business accounting easier, including payroll software, using a bookkeeper, or running your payroll manually. The option you choose is going to depend on what is most appropriate for your needs.

If you have a larger business with many employees and contractors, running the payroll on your own is going to be most difficult. Payroll services from a professional can be really helpful if you’re not sure how this process works, so don’t be afraid to reach out for help.

You’ll also want to consider your pay schedule options, what sort of method you want to use to pay, and all regulations for taxes that need to be met.

Run Your Payroll

Next, you need to determine how much employees and contractors will be paid before the payments go out.

Gross pay is what the person earns before any taxes or deductions are taken out. Contractors get gross pay and then do their own taxes, but employees will have their deductions taken before the payment gets to them. You will use gross pay to determine how much is withheld from your employees specifically based on their hourly or salaried status.

Taxes and deductions may include:

  • FICA taxes
  • Income taxes
  • Healthcare or retirement deductions
  • Court-ordered withholdings (child support, spousal support, etc.)

The net pay is what your workers actually get on payday. You can either provide this through direct deposit, check, or transfer from the business account to the worker’s debit card. While most people get their paychecks through direct deposit, there are alternative ways to do this if you would prefer a different method.

Keep Records

You’ll have to record all of the payroll process actions that you take. Right after payday, you’ll want to send taxes that were withheld to the appropriate taxing agencies and pay any additional employer contributions that your employees may have.

In addition to this, you need to record and store any documents that were used in relation to employee and contractor pay. This might include time cards, commission plans, pay stubs, or W-2 forms.

Most employers are required by law to keep payroll records for at least 3 years, but if you’re a small business, it’s advised to keep them for at least 4 years.

Learning How to Pay Employees and Contractors

As you can see, the requirements you need to know when figuring out how to pay employees or contractors is fairly simple.

You just need to have a solid payroll system in place, and there are professionals out there that can make this process easier.

Did you like this article? If you did, take a look at some of our other business-related topics next.

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