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Should My Small Business Have a Payroll System?

What are employer taxes and how much are they? Do I actually have to have hang those labor law posters? Do I need really need to have payroll set up if I only work with contractors? Here are a few short answers to these common questions.

So…What percentage of my business’ revenue should be dedicated to payroll?

Percentage of payroll should be between 15 and 30 percent of gross sales is average for most businesses. Service industries can get up to about 50 percent.

And...How do I set up payroll?

To start payroll, you need the following:

  • An EIN (Employee Identification Number). Your tax accountant or attorney can assist you with this process. If you’re savvy, you may be able to apply yourself at the IRS EIN Application site:

  • Get your local and state business ID (if necessary)

  • Gain all your employees’ information through hiring documents. These documents can sometimes be found on your state’s website for all the mandatory forms.

  • Classify your employees.

  • Choose your pay period.

  • Pick a payroll company or system.

  • Start service.

Uhm...What are employer taxes and how much are they?

Employer taxes are the taxes that a business pays for each employee. Below is a typical breakdown:

Federal Unemployment (FUTA) – 6.0%

Social Security – 6.2%

Medicare – 1.45%

State Unemployment – Varies by state

Local Taxes – Varies by locality

Make sure you check with your payroll service provider for the most up to date tax information.

Do I have to hang those Department of Labor posters?

Yes. The federal labor law posters are mandatory. Your business may also be required to have the labor law posters for your state. They are usually inexpensive but may be included with the payroll service provider you chose.

My business is an LLC with only contractors. Do I still need payroll?

In short, maybe. Payroll as a regular service may not be needed to pay contractors unless you want to track what you’re paying them. This can also be tracked on your own…but you must be diligent and consistent with detailed tracking in a spreadsheet. Payroll services could provide a simple solution with filing the 1099 forms that need to be submitted to the IRS and to the contractors.

However, if your LLC is registered with the IRS as a corporation you must have payroll (even if for you as the owner) due to the registration of the corporation that must be separate from the owner. Translation: The owner’s pay must be tracked, taxes must be taken out, and W2 form must be issued at the end of the year to the owner and any employees. Contractors are still optional are far as paying them through payroll, but 1099 forms are still required at year end.

*If you have questions, or want more information on this topic, you can contact The HOPE Accounting Firm at 216.744.9303 or at

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