The 6 Steps to Set Up Payroll for Your Small Business

Small business owners know that setting up payroll is something you want to get right the first time. Getting some payroll software can certainly help, but before you look for it, there are a few preliminary steps it would behoove you to take.

Steps to Setting Up a Payroll System

Setting Up a Payroll System

Let’s go over those right now. If you don’t set up your payroll correctly, it’s likely going to mean many headaches down the line.

Register All Necessary Accounts

Gathering all the necessary payroll information is going to be the first step of this process. For most businesses, you’ll need to register your state’s new hire reporting account. You’ll have to register your workers compensation coverage and any necessary state tax accounts, such as your unemployment tax account.

You’ll need to set up an Electronic Federal Tax Payment System account for paying federal taxes, sometimes abbreviated as EFTPS. You’ll also have to register your Employer Identification Number, or EIP.

Once you’ve done all this, you’ll be able to input all the ID numbers into any of the complete payroll solutions you might purchase, such as a ready-made or a proprietary software suite.

Have Your Employees Fill Out Their W-4 Tax Forms

Next, you’ll need to collect all relevant employee information. What info you need from each employee will depend to some degree on your business model.

At a minimum, you’ll want each employee to fill out a W-4 tax form. This is what you’ll use to determine how much money in taxes each employee wants you to withhold. Depending on your business’s location, some of your workers might have to complete out-of-state tax withholding forms.

Once you have those W-4s, you can feed them into the payroll services software you’ve acquired. That software can automate the sending of tax information to your workers each year when tax time rolls around, saving your HR department from having to do it.

Set Up Employee Benefits

Next up, you’ll set up your employee benefits. The details will depend on what exactly you offer your workers. Some will be required, and others will be optional.

For instance, you might offer your employees things like health insurance, disability insurance, or a retirement plan. They can opt in if they like, but they don’t have to. Things like FICA taxes and unemployment tax are not optional.

Make a Decision Regarding Overtime Wages

You will have to decide whether you’ll make each employee eligible for overtime wages, and then you’ll feed that information into your payroll software. If you want to make an employee exempt, you can only do that if the worker meets certain criteria.

They need to have job duties that make them exempt. They have to earn a salary, and they also have to make at least $35,568 each year or $684 per week. If your workers do not meet all three conditions, they are nonexempt, meaning you must give them overtime pay if they work overtime hours.

Choose a Salary vs. Hourly Pay Structure

You’ll need to determine whether it makes more sense to set up an hourly employee pay structure vs. salaried. There are positives and drawbacks with each option.

Presumably, the company heads will get together and work that out. You’ll also talk about it with each candidate before you hire them. In some industries, your workers can also collect additional monies such as tips or commissions, so you may want to consider that.

Select a Payment Frequency

Finally, you will need to choose a payment schedule. Many workers appreciate a weekly payday, but you might choose to pay them every two weeks or even once per month if that will better suit your business model.

At this point, you’ll also need to determine how you’re paying your employees. Many businesses set up a direct deposit system for their workers, so the money goes right into their accounts. However, some employees would rather you give them a physical check each payday.

Now, you should have everything in place that you need for this critical business task. Once you have the right payroll software suite and you’re up and running, you should be able to avoid mistakes and achieve employee retention.

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About the author

Mohd.Sohel Ather

Sohel Ather, a graduate of computer sciences from IETE, is the senior principal engineer. He focuses on up-and-coming technological advances and likes to work on Guest Posting, SEO, CRO, Growth Hacking, and Online Marketing Strategies.