According to Deloitte, 90% of organizations use online payroll services and 74% of organizations have fully documented pay policies.
However, as a small business, you might feel a bit overwhelmed at the idea of learning how to set up payroll for the first time.
There are numerous different documents, numbers, and figures to think about. That doesn’t even include the fact that you can run into some serious legal problems if you’re not careful about how you pay and your employees.
Need help learning how to set up payroll? Keep reading. We’ve got you covered every step of the way.
What Information Do You Need to Set Up Payroll?
Setting up payroll for the first time means that you’ll need to gather some necessary information. You’ll also need to set up a few accounts before you even think about registering for a payroll service.
If your business is in the United States, then you’ll need to make sure you have:
- Your company’s Employer Identification Number
- An Electronic Federal Tax Payment System (EFTPS) account so that you can pay federal taxes
- State tax accounts depending on the location of your business
- A new hire reporting account for your corresponding state
- Worker’s compensation coverage (depending on your state)
As you can see, a few of these things vary from state to state. For example, companies in Texas don’t have to carry worker’s comp for their employees.
This means that you’ll want to check with a local business or tax advisor in your state to make absolutely certain that you have everything you need in order before beginning payroll services.
On top of this, you’ll also need to collect some documents and information from your employees themselves.
Every time you hire a new employee, you’ll need to have them fill out a W-4.
This is the personal allowances worksheet from the US government that allows them to claim allowances and figure out how much income tax withholding you’re going to take out of their salary.
If you register your company in a state that has state income tax, then they’ll have to fill out the corresponding form for the state as well.
Think About Employee Benefits
Offering employee benefits is pretty important in today’s competitive job market. If you want to snag top talent, then you’re going to have to offer them good business benefits.
While this is a good business practice, it also means that you’ll need to do a little bit more work when it comes time to register for payroll services.
When you have an employee fill out their W-4, simply give them the election information regarding benefits at the same time to make things easier.
When they hand back all of the documents to you, you’ll be able to figure out how much you need to withhold as a business in order to cover the benefits.
This is where you’ll figure out whether the withholdings are pre-tax or post-tax deductions.
Pre-tax deductions reduce the amount of income that your employee has to pay tax on, which makes things a bit easier for them.
Post-tax deductions don’t affect their taxable income.
Overall, pre-tax deductions offer benefits for both you and your employees. Health insurance, life insurance, and certain 401k programs are examples of pre-tax deductions that you can offer your employees.
Make Important Payroll Decisions
Now that you have all of the information that you need, it’s time to start classifying your employees.
There are certain tax and revenue differences between having an employee work for you as a full-time employee or as an independent contractor.
If you hire someone as a 1099 freelancer, then you don’t have to withhold any taxes for them or factor in payments that you’d normally make to Social Security or Medicaid.
You’ll also need to ensure you’re classifying each employee as exempt or non-exempt, which really just determines whether or not you’re obligated to pay them overtime.
To qualify as an exempt employee, they have to earn a yearly salary of at least $23,600. They’ll also need to have job duties that are “exempt,” which is up for interpretation depending on the job role.
Finally, you’ll need to determine how you’re going to pay your employees and how often you’ll pay them.
Figure out what works best for you. Depending on the job role, you might find it easier to pay your employees an hourly rate.
If that’s the case, however, then you’ll need to remember that these employees can usually work extra hours to earn more money. Salaried employees receive a set amount of wages a month regardless of how many hours they work.
Most companies choose to pay their employees monthly or biweekly, but you are free to make that decision based on your business structure and income.
Choose a Payroll Service
This sounds like a lot to keep track of, doesn’t it? Payroll is certainly a pretty dense area of business, which is why most companies use payroll services to help them ensure they’re doing it right.
If you’re ready to set up payroll processing services, then you’ll want to look for a few things. Look for a service that:
- Allows you to store your information and work from a cloud network
- Offers you the ability to choose from multiple payment options (direct deposit, paper checks, etc.)
- Includes additional features such as paid time-off management or unemployment insurance
- Generates detailed payroll reports for you and your accounting department
- Integrates with the business programs and software that you normally use
- Offers excellent customer support when you have issues
- Is easy to use!
While this isn’t a complete list of everything you should look for, the above points are crucial when choosing a payroll processing service.
Shop around and be sure to check the online reviews of each company. It helps to look for payroll services that specialize in your specific industry or that have experience working with your business structure.
If you employ lots of freelancers, for example, then look for a service that handles freelance payments really well.
Be sure to choose a service that makes financial sense for your company. Some payroll services offer plans that go up in pricing as you grow.
This means that you’ll be able to create your own payroll plan in a sense. As you add more employees to your payroll, you’ll pay a little bit more.
This makes more sense than paying for an expensive plan as a small business and not using all of its functions or features.
Keep Track of Your Payroll Records
Federal labor laws require that you keep track of specific data for each pay period. If you’re using a payroll service or software, they should store all of this data in the cloud for you.
But, if you’re setting up payroll alone, then you’ll want to make sure you keep track of all of your payroll records in a safe place (preferably online).
This means keeping track of physical and digital time cards that employees send you, pay stubs, and even contracts that detail the terms of payment.
It’s important to note that if you plan to keep track of employee payment records physically, then you’ll want to be careful about how you store sensitive information.
These records contain confidential information, such as Social Security numbers, so you’ll need to think about the security of your storage system.
This will help you avoid any major legal problems in the instance that somebody accesses all of your employees’ information.
According to The Department of Labor’s Wage and Hour Division, a company only needs to keep payroll records for three years and tax records for four years.
This is why it’s best to invest in an HR or payroll software that will store everything for you electronically. Likewise, it’s also great to hire excellent HR and accounting staff to take care of all of the ins and outs of payroll services.
Integrating Payroll with Other Business Services
Learning how to set up payroll is just another part of creating a solid business structure.
As an entrepreneur, it’s important to think about these seemingly small details in the beginning before they become big problems later down the road.
If you’re creating a business and you know that you’re eventually going to hire employees, then it makes total sense to go ahead and do your research when it comes to payroll processing services.
Do it now before you have employees. When you eventually hire them, you’ll have everything in place. This will help you avoid operational problems, legal issues, and tax hurdles.
Find a way to integrate payroll with your other business services and you’ll be all set to go.
Need more startup and small business finance tips? Head over to our Money & Finance section!