Congratulations on having so much growth in your business that it’s time to hire an employee or a dozen to help you! Unless you’re an accountant by trade, figuring out exactly how payroll should work for your new employees can be complicated for businesses to figure out. Here are few things you should know as you prepare to being processing payroll for your new employees:

Properly Classify Your Workers

Do you know the difference between a W2 employee and a 1099 contract? An employee is someone whom you, or someone in your office, manages. They generally work onsite, is provided training to do their job, and you ultimately dictate what they produce. They are eligible to receive any company benefits available. You also must deduct taxes from their paychecks as well as pay payroll taxes on their income.

A contractor, on the other hand, is someone who is fully equipped to provide a service for you. They usually have their own tools, work off-site, can work for multiple companies at the same time, and are hired to complete a set of tasks. You do not have to withhold taxes from their checks, nor do you pay payroll taxes on their wages.

The distinction may not seem important, but the IRS is hammering down on businesses that misclassify their employees to save costs on payroll expenses.

Get an EIN Number

If you’re in a partnership or corporation business entity, you already have an EIN number. The EIN is an employer identification number provided by the IRS. As a sole proprietor, you’ll need to contact the IRS to be issued an EIN before you can begin to process payroll for your employees. You can access one online and

Set Your Budget to Include Not Only Wages, But Payroll Taxes

In addition to making sure that you can afford to pay your employee the wages you offered them, it’s vital that you also budget for the payroll taxes that must be paid to both the federal and state governments. This includes matching the Social Security and Medicare tax amounts that is withheld from your employee’s pay. This amounts to 7.65% of their gross pay. You are also required to fund the federal unemployment fund by paying GUTA tax.

Ask Your Payroll Processing Company to Automatically Deposit Federal & State Taxes

If you decide that keeping up on the regulations in your state and by the federal government isn’t something that you want to be responsible for, hiring a payroll processing company is a great way to make sure that you’re in compliance. If you hire a payroll company, request that they automatically make the federal and state tax deposits for you. Falling behind in payroll tax deposits can get expensive very quickly and you can be levied a 100% penalty for failing to turn over withholdings by their due dates.

By following these tips and making sure you have a EIN, classifying your new hires correctly, budgeting for the true cost of your payroll, and having your payroll processing company make automatic deposits of your tax liabilities, you will save yourself many headaches and possibly thousands of dollars in fines.