Ten Steps to Setting Up a Payroll System for Your Small Business

Payroll solutions for small business

Whether you have one employee or 50, setting up a system for payroll for small companies streamlines your ability to stay on top of all of your legal and regulatory responsibilities as an employer. A payroll processing system can also save you time, and help protect you from incurring costly IRS penalties.

  1. Obtain an Employer Identification Number (EIN) - Get an EIN from the IRS before you hire any employees. This number is necessary for reporting taxes and other documents to the IRS.
  2. Check Whether You Need State/Local IDs - Some state/local governments require businesses to obtain ID numbers in order to process taxes.
  3. Know the Difference Between Independent Contractors and Employees - Be clear on the difference between the two, as it affects how you withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes.
  4. Take Care of Employee Paperwork - New employees must fill out Federal income tax withholding Form W-4. Your employee must complete this form and return it to you, so that you can withhold the correct federal income tax from their pay.
  5. Decide on a Pay Period - You may already have a manual process for this, but setting up a pay-period is sometimes determined by state law. The IRS also requires that you withhold income tax for that time period even if your employee does not work the full period.
  6. Carefully Document Your Employee Compensation Terms - You’ll want to consider how you’ll handle paid time off, how you track employee hours, if and how you pay overtime, and other business variables.
  7. Choosing a Payroll Processing System - Payroll administration requires an acute attention to detail and accuracy, so it’s worth doing some research to understand your options. Start by asking fellow business owners what services they use, and what they would recommend.
  8. Running Payroll - Once you have all your forms and information collated, you can start running payroll. Depending on which system you use, you’ll want to enter it yourself, or give the information to your accountant.
  9. Get Savvy About Record Keeping - Federal and some state laws require employers to keep some records for a certain period of time. You need to keep W-4 forms, W-2s, copies of filed tax forms and dates, and amounts for all tax deposits.
  10. Report Payroll Taxes - There are several payroll tax reports that you are required to submit to the appropriate authorities on either a quarterly or annual basis.

Payroll processing can be a huge task for small companies, but whether you decide to do it yourself or hire a payroll processing company, it’s important to do your research to make sure everything is done correctly and your payroll processing system is in order. Find more on this here.

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