How to Set Up Payroll for Your Small Business: 9 Key Steps

How to Set Up Payroll for Your Small Business: 9 Key Steps

Learn 9 Key Steps to Set Up Payroll for Your Small Business

Highlights

  • Setting up payroll requires careful planning and being familiarized with tax and labor regulations.
  • Before running payroll for the first time, employers need to collect relevant information, classify employees correctly, and choose a payroll schedule.
  • Access Point helps businesses simplify their payroll function by providing accurate and timely processing, ensuring compliance, and minimizing admin burden. Contact us today for a free consultation.

Every business needs a solid payroll system. This guarantees your employees get paid on time, keeps you compliant, and helps you maintain accurate, healthy financial records.

However, for new business owners, setting up payroll for the first time might be daunting. This guide shows you how to set up payroll for your small business with confidence, ensuring you don’t miss any important details.

Let’s dive in!

Properly Classifying Workers as either Employees or Independent Contractors Is a Crucial Step

Setting Up Payroll in 9 Steps

Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a unique nine-digit number assigned by the IRS to businesses operating in the U.S. It serves as a federal tax identification number and is essential for various business purposes, including payroll processing.

You should apply for an EIN as soon as you start your business, even before you hire employees or open a business bank account. Having an EIN in place right from the start will ensure compliance and avoid potential penalties or delays in your business operations.

Understand State and Local Payroll Requirements

Payroll requirements can vary across different states and localities. Learning about the specific regulations that apply to your business (and staying compliant) will keep your business safe from penalties and legal issues.

Common payroll requirements involve:

  • Payroll taxes. Each state has its own set of tax rates and rules for income tax withholding, unemployment insurance, and other employment-related taxes. Additionally, some cities or counties may impose additional taxes or fees.
  • Labor laws and wage requirements. Certain states and localities have specific minimum wage rates, overtime rules, and regulations regarding employee benefits, such as paid sick leave or family leave.

It’s important to monitor payroll regulations, as laws and rates can be updated periodically.

Classify Your Workers Correctly

Properly classifying workers as either employees or independent contractors is a crucial step. Misclassifying workers can have serious consequences for small businesses. If the IRS determines that a worker classified as an independent contractor should have been treated as an employee, the employer may be held liable for back taxes, penalties, and interest.

To ensure you are classifying workers correctly, we recommend consulting with legal or tax professionals.

Set Up a Payroll Schedule

There are several options to consider when setting up a payroll schedule. The right choice for your business will depend on your business needs, the type of industry you are in, and workers’ preferences. You can opt between:

  • Weekly payroll
  • Bi-weekly payroll
  • Semi-monthly payroll
  • Monthly payroll

Collect Employee Information and Forms

Before running your first payroll, you’ll need to collect essential forms and data from each employee. This includes:

  • W-4 Form: This form determines employees’ federal income tax withholding amount based on their filing status, dependents, and other factors. Every employee must complete and sign this form when hired.
  • I-9 Form: The I-9 verifies an employee’s eligibility to work in the United States. Employers must complete this form and review acceptable documentation within three business days of hiring.
  • Direct deposit authorization: Employees need to provide their bank account and routing numbers for electronic payment transfers.
  • Employee information sheet: Create a standardized form to collect additional details like name, address, Social Security number, date of birth, and emergency contact information.

Beyond forms, you may need to obtain copies of certain documents, such as driver’s licenses or Social Security cards, to complete the I-9 process properly.

Always keep employee records accurate and up to date. This will help you avoid payroll errors or compliance issues. 

Choose a Payroll System

When setting up payroll for your small business, you have three main options for processing payroll: manual payroll processing, using payroll software, or outsourcing to a payroll service.

Let’s take a closer look at each of these options:

Manual payroll processing

Manual payroll processing involves calculating and recording payroll data by hand or using basic tools like spreadsheets. While this method can be suitable for very small businesses with only a few employees, it is time-consuming, prone to errors, and becomes increasingly complex as your business grows.

With manual processing, you are responsible for keeping up with changing tax laws and regulations, which can be a daunting task.

Payroll software

Payroll software automates many of the tasks involved in payroll processing, such as calculating deductions, generating pay stubs, and filing tax forms. This can save you time and reduce the risk of errors compared to manual processing.

However, payroll software still requires you or someone on your team to manage the system, input data accurately, and ensure compliance with constantly changing regulations.

Payroll services

Outsourcing payroll to a dedicated service provider is often the most efficient and reliable option for small businesses.

Payroll services take care of all aspects of payroll processing, including calculating wages, withholding taxes, filing tax forms, and distributing payments to employees. They have teams of experts who stay up to date with the latest payroll laws and regulations, ensuring your business remains compliant.

Calculate Gross Pay and Deductions

Gross pay is the total amount an employee earns before any deductions or withholdings are taken out. For hourly employees, this is calculated by multiplying the number of hours worked by the hourly rate. For salaried employees, gross pay is their annual salary divided by the number of pay periods in a year.

Once you’ve determined the gross pay, you’ll need to calculate the deductions and withholdings.

Common deductions include:

  • Federal income tax withholding
  • State income tax withholding
  • Social Security and Medicare taxes (FICA)
  • Health insurance premiums
  • Retirement contributions
  • Other deductions: Depending on your company’s benefits and policies, you may need to deduct other amounts for items like union dues, garnishments, or charitable contributions.

Process Payroll and Distribute Payments

After gathering all the necessary information and calculations, it’s time to process payroll and distribute payments to your employees. This step involves a series of sub-tasks that you must complete accurately and on time.

  • Review and verify information: Before processing payroll, double-check all the information you’ve collected, including employee hours, pay rates, deductions, and tax withholdings.
  • Run payroll calculations: Use your chosen payroll system or software to calculate the net pay for each employee. This involves subtracting deductions and withholdings from their gross pay.
  • Generate payroll reports: Most payroll systems will generate reports summarizing the payroll run, including total wages, taxes withheld, and deductions.
  • Approve and finalize payroll: Once you’ve verified the accuracy of the calculations and reports, approve and finalize the payroll run.

File Payroll Taxes and Maintain Records

As an employer, you are responsible for accurately calculating, withholding, and remitting payroll taxes to the appropriate federal, state, and local tax agencies.

Each tax has specific filing deadlines and requirements that vary based on your business location, number of employees, and total tax liability.

Manual Payroll Processing Is Time-Consuming, Prone to Errors, and Becomes Increasingly Complex as Your Business Grows.

Simplify Payroll for Your Business with Access Point

Setting up payroll for your small business requires careful planning and attention to detail. Inefficient processes can lead to costly errors and frustrated employees. Not to mention the amount of time and expertise required from your internal team to run accurate and efficient payroll.

The good news is that you don’t have to go through it on your own.

At Access Point, we offer comprehensive payroll services tailored to the needs of small businesses. Our team of experts can guide you through every step of the process, ensuring full compliance and freeing up your valuable time so you can focus on core business operations.

Contact us today to schedule a consultation and learn how our payroll solutions can streamline your HR tasks and help your business thrive.


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