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Preparing for Your First Payroll
Before you can run your first payroll, you will need:
- A suitable legal structure for your business
- Workers compensation insurance
- A state payroll tax account
- State unemployment insurance
It’s also important to get professional tax advice from someone in your area and will need to choose a payroll provider.
Getting Professional Tax Advice
You should take the information you learn in this course and run it by a CPA (Certified Public Accountant) or EA (IRS Enrolled Agent) in your area. However, you might be wondering, which is right for you?
A CPA can certainly be helpful when starting and growing your business. However, an EA is often better suited to small business owners. A CPA can provide more broad based advice, including review or audit of your books / financial statements, help with budgeting and cash management, accounting, and taxation. However CPAs are often more expensive and looking for bigger ticket clients, they may charge over $200 per hour. EAs tend to be more willing to help small business owners and tend to start around $125/hr.
An EA can provide advice solely geared towards taxation, which is exactly what you need when hiring staff. An EA can help you:
- Set up payroll tax accounts in your state
- Set up your state unemployment tax account
- Find affordable workers compensation insurance
- Understand the differences between independent contractors VS employees in your state
- Decide on your business entity
- Find answers to any questions you have about your taxes and unique situation
How to Find an Enrolled Agent
If you are in the United States, the easiest way to find an EA is to search the directory at the National Association of Enrolled Agents:
Call a few EAs and leave a voicemail. At least one EA should call you back. The best professional advisors offer at least one free hour of consultation. Be sure to take advantage of those free hours and get as many questions answered before you need to start paying.
Choose a Payroll Provider and HR Support
A payroll company like Quickbooks Online or Gusto will:
- Completely manage paying all payroll taxes correctly
- Provide direct deposit for staff
- Correctly report all required documentation for you: I-9, W-2, 941, etc.
- Provide HR consulting
- Help review or create your Employee Handbook
Quickbooks offers Payroll and HR support in:
- The United States
- Canada
- United Kingdom
- And more—call Quickbooks to see if they support your country
As of 2022, Gusto only provides service in the United States.
Payroll and HR Advice
It’s recommended to use either Gusto or Quickbooks Online for your Payroll and HR advice. To run payroll, you simply enter the number of hours each sitter worked during a pay period. Then, you enter the dollar amount of the mileage reimbursement. They take care of the rest.
To get both Payroll and HR advice from either Gusto or Quickbooks, you will need to sign up for their premium payroll subscription:
These plans are expensive, however you only need the premium subscription while you are developing your HR policies and Employee Handbook. Once you have your HR practices set, you can downgrade to the basic payroll only subscriptions:
Even with the basic payroll subscription, you will get up to date and streamlined access to any government tax credits, stimulus money, and other programs available to employers. And, since they are administered through a large payroll service, you can be sure they are done correctly.
Get $100 off Gusto
If you choose Gusto for your payroll and HR needs, I would really appreciate it if you use the links above to sign up. By following the above links, you will receive $100 off the subscription cost when you run your first payroll. We also receive a small commission, which helps us keep this website going.
Gusto VS Quickbooks
Gusto is a better payroll service. I used Gusto in my business and was very happy with them. They tend to offer more in-depth support and their staff tends to be more professional. Also, Gusto will generate an employee handbook for you.
When you are getting started with hiring staff you want to be sure you are getting expert HR advice. While Quickbooks will likely get you the answers you need eventually, their support can be hit or miss. Gusto, on the other hand, is a smaller company and provides more comprehensive support to each of their clients.
Remember, no matter who you choose, you can always switch later on. Also, Gusto only offers service in the United States, so if you are elsewhere, Quickbooks would be a better fit.
Local Options
You can often find a local CPA, bookkeeper, or HR advisor that would be happy to file payroll taxes for you. However, local services cost much more than the online options and may not offer a comprehensive service.
What about Paychex?
Paychex is another payroll provider. However they tend to be better suited for larger companies. Their service is much more expensive than Gusto and you may not see the benefit of their more in-depth HR services.
DIY Payroll?
Some folks will wonder if they should simply file their payroll taxes themselves. This is not recommended. Even though a payroll service is expensive, you will often find you are spending more time sorting out the ever changing tax laws, rather than growing your business. Also, if you ever make a mistake, you could be looking at some hefty fines.
Set Up a Suitable Legal Structure for Your Business
Next, let’s cover some of the nuts and bolts of what you need to do before you can hire your first employee.
Before you can setup:
- Worker’s compensation insurance
- A payroll tax account
- Or, state unemployment insurance
you will need a suitable legal structure for your business and an Employer Identification Number (EIN number).
LLC vs S-Corp
In most cases, the following legal entities are well suited for pet sitting companies:
- Limited Liability Company (LLC)
- S-Corp
If you make less than $40-45K per year after expenses, an LLC is a good choice of business entity for you. Having an LLC protects your personal assets from liability that may arise in your business. You can register your LLC yourself by calling your Secretary of State office and asking them what forms you need to fill out. However, if you feel more comfortable having a professional register your company, an Enrolled Agent (EA) or a Certified Public Accountant (CPA) can help with this step.
If you make 45K per year or more (bottom line) with your business, you could consider registering your company as an S-Corp. With an S-Corp, you will not need to pay self-employment taxes on any money you make above $40-45K. Self-employment taxes are usually around 13%, so it can add up to a considerable tax savings if you are making enough bottom line income to get the benefits.
If you are not sure which entity is right for you, or if you have questions about either legal entity, be sure to talk it over with a tax professional in your area.
How to Get Your EIN Number
An EIN number is also sometimes referred to as a Taxpayer Identification Number (TIN number). For a small business, they mean the same thing.
To get an EIN number, you will need to register your business as a legal entity with your Secretary of State. Then you apply for your EIN number through the IRS.
You can apply for your EIN here:
Be sure to read the instructions and click “Apply Online Now” when you are ready to apply for your EIN.
Workers Compensation Overview
In many states, all public and private employers are required to provide Workers Compensation coverage to its employees. Workers Compensation is an insurance plan paid for by the company to provide medical coverage and wage replacement if / when employees are injured as a result of performing their work duties.
Be advised that the states have departments that audit and investigate randomly or due to calls and / or complaints. Your state’s Department of Labor and Employment may audit for items such as:
- employee or employer records
- or classification of workers
Part of worker classification is ensuring that any and all Independent Contractors are not truly employees. If misclassifications are found, the employer may be fined up to $5,000 per misclassified employee for the first misclassification and up to $25,000 per misclassified employee for a subsequent misclassification. Please see section Employee vs. Independent Contractor in the HR Considerations lesson for more information about worker classification.
How to Get Workers Compensation Insurance
The following information is also available in our article How Much to Pay Pet Sitting Staff. However, since we are going into more detail, we will cover some of the same information here.
Every company will have a different cost for workers compensation insurance. It’s recommended that you get a few quotes from various workers compensation insurance brokers before choosing the best option for your company.
Be sure to check if your state has a State Funded Option. These tend to be much cheaper than private insurance, but it varies. As of 2022, the following states have state funded workers compensation insurance:
- California
- Colorado
- Hawaii
- Idaho
- Kentucky
- Louisiana
- Maine
- Maryland
- Minnesota
- Missouri
- Montana
- New Mexico
- New York
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- Texas
- Utah
There is a chance private insurance will be cheaper than your state fund, so be sure to get quotes from private insurance as well. One of the best places to get a quote is from your Payroll Service. In addition to providing a managed payroll service and HR consultation, both Gusto and Quickbooks Online offer competitive pay-as-you-go workers compensation insurance.
Be sure to get a quote from:
Setup Your Payroll Tax Account and Unemployment Insurance
Once you have your worker’s compensation insurance decided on, you can move on to setting up your
- Payroll tax account
- State unemployment insurance
Again, an Enrolled Agent or a CPA can help you with these. However, it may be less expensive to use the online service CorpNet to set up these accounts. Their tax registration bundle starts at $199 and can be found here:
Summary
Once you have the items covered in this article set up, you can in fact start hiring employees. However, it’s important to go through the other lessons in this course to make sure you are selecting the right candidates, onboarding them well, and following other HR guidelines.