Once your eCommerce business has one or more full-time employees, it is critical to set up a payroll process.
A payroll process can save you time, increase your payroll efficiency, and help ensure you’re compliant with local, state, and federal regulations. You’ll need to make sure you withhold the proper taxes, maintain financial records, and make sure you pay your team – both employees and contractors – on a regular basis.
Because payroll can get complicated quickly depending on your business’s size, the number of employees, and workers’ classification and location, we’re sharing some tips to help you create and manage payroll with less stress.
Establish a payroll process
The first step is to determine how much to appropriately pay yourself as the eCommerce business owner, according to your business type (i.e. LLC vs. S Corp, etc).
Then, you’ll need to create a process around payroll. This process will vary depending on where your business is located.
For example, if your business is based in the U.S., you’ll want to establish a payroll process that keeps you in compliance with all rules and regulations from the IRS and Fair Labor Standards Act.
When setting up this system, you’ll want to consider:
- The type of compensation your employees receive, such as hourly wages, fixed annual salary, or commission
- Whether a person is categorized as an employee, contractor, or freelancer
- What paperwork and tax forms you need from each individual
- The process you’ll use to ensure you’re properly withholding taxes, filing taxes on time, paying your workers on time, and any required benefits
How to pay employees
The simplest way to pay your employees is to use a payroll app like Gusto. Gusto integrates with Xero and makes it easy for you to comply with labor law compliance and tax withholding when you hire an employee.
Pro Tip: For US businesses, you must also withhold federal and state income taxes from your employee’s paychecks as well as Social Security and Medicare. You also have to file reports and specific tax forms for your employees.
Another reason to use Gusto, or another payroll app (There are loads!), is it makes it easier to onboard new employees.
For example, to set up payroll for a new U.S. based employee, you’ll need to have the following information:
- Full name
- Employment start date
- Tax filing number
- Current address
- Date of birth
- Form I-9 to verify their eligibility for employment in the U.S.
- W-4 form
As an employer, you must report wage and salary information for your employees on IRS Form W-2, called the Wage and Tax Statement form. This form reports the amount of federal, state, and other withheld taxes during the tax year. The IRS requires you to send these forms to all employees by a specific date, typically no later than January 31.
You also are required by the IRS to withhold and remit taxes on behalf of your employees throughout the year. Fortunately, withholdings and payments can be handled through payroll software, like Gusto, to save you time and ensure compliance with rules and regulations.
Payroll software often helps you prepare the necessary quarterly reports for your business and filing taxes. Additionally, some platforms also will file local, state, and federal taxes for you. These types of services help ensure you’re staying in compliance and also save you time.
How to pay independent contractors and freelancers
Hiring contractors and freelancers can save you money since you aren’t responsible for their taxes and don’t have to provide them with benefits. When determining an individual’s classification, keep in mind that you or the person saying they are a freelancer or contractor isn’t sufficient. You still have to ensure they meet the criteria for that status as defined by the IRS.
According to the IRS, a freelancer or contractor typically can work when and where they want, can work for multiple businesses, use their own tools, and control their own work process. These types of arrangements are more like a business-to-business arrangement. When hiring an international contractor, you’ll also need to make sure you’re complying with their local laws and regulations.
While you don’t need to withhold taxes for contractors, you still have tax reports and forms to complete. If you are a U.S. company paying a U.S. freelancer, you’ll need to keep track of how much you’re paying each freelancer. Before working with the contractor, you need to send them the Form W-9. The contractor completes this form and returns it to you. It helps you collect the information you need to file taxes at the end of the year.
Pro Tip: Save these forms in a tool, like HubDoc, for easy access at year end.
If you’d paid a U.S. freelancer or contractor at least $600 in the tax year, you’ll need to file Form 1099-NEC Nonemployee Compensation to report independent contractor income to the IRS. You’ll also have to send a copy to the freelancer.
For freelancers and independent contractors that are also located in your country, it is often easiest to pay them through Gusto. Everything is in one place.
However, when working with and paying your international contractors, you’ll want to consider exchange rates, potential fees, and how fast the payment will be received. Many companies in the past used wire transfers because it is simple and secure. However, it can often take up to five days for the payment to be delivered, and the fees can be high.
Another option is a digital payment service to save you time and money. Digital app-based payment services are typically easy to use, fast, and available in many countries. These services usually provide payment tracking and the ability for a business to control how they pay contractors. Contractors also benefit since they can choose how and where they deposit or withdraw funds. While there are many digital payment services, we commonly recommend using either Wise, Airwallex, or sometimes PayPal.
Wise uses a real exchange rate, has low transfer cost, has instant transfers for some currencies, and lets the employer make multiple payments at once. You can also seamlessly incorporate those payments with your accounting software for easy tracking.
Airwallex also provides delivery in one business day or less and offers simple low fees and competitive rates. You can integrate your payment transactions with online accounting software to make your bookkeeping easier.
PayPal is familiar to many businesses and contractors as it’s used around the world. It provides flexible payment options and can be used on a mobile device or computer. It’s accepted in over 200 countries and supports 25 currencies. It does come with transfer fees, and you should check the exchange rate.
Note: If you are a U.S. business paying an international contractor, you’ll pay them differently than a U.S. freelancer. You’ll need to collect Form W-8NEN to document and prove the person is not a U.S. contractor. If you’re working with an international contractor that acts as an entity, you’ll give them Form W-8BEN-E.
4 additional tips for managing payroll efficiently
There are many best practices you can incorporate to keep your payroll process running efficiently. Here are some strategies that can help you manage and maintain your payroll efficiency.
1. Process your payroll and payroll taxes on time
Establishing and maintaining a set payday schedule, using a tool like Gusto AutoPilot, ensures your employees always know when they are being paid. Maintaining a schedule also helps you avoid errors in payment due to rushing, such as overpaying.
Processing payroll on a schedule can also help ensure that payroll taxes are made on time throughout the year. This process is easier if you use automated accounting and payroll software, such as Gusto and Xero.
2. Establish a paperless payroll system
Technology makes it easier to have a paperless payroll process. Going paperless helps you cut costs, maintain the security of your business’s data, and helps you ‘go green.’ Additionally, many employees prefer not having to deal with paper pay stubs or physical checks. It can be easier for your employees to receive pay electronically and have a portal system that keeps their information organized.
3. Perform regular audits of your payroll system and processes
Auditing your payroll regularly helps ensure your system is working efficiently and correctly. When conducting a payroll audit, review the payroll rules and policies. Look for any rules that are confusing or contradictory.
Make sure that each step of the payroll process, including any technology being used, is working correctly.
4. Review state and federal tax requirements and rules periodically
Failing to file information on time or being out of compliance with state and federal rules and requirements can cost your business a significant amount of money. Create a regular schedule for reviewing state and federal requirements and make it part of your process so you’re always fully informed and can avoid costly errors.
In sum, a payroll process can save you time, increase your efficiency, and help ensure you’re compliant with local, state, and federal rules.
Whether you are looking for bookkeeping support, help with payroll compliance, or need to clean up your Xero account, we can help. Schedule a free call with a Bean Ninjas team member today.