Setting Up Payroll For Your Business

Setting Up Payroll

At this point you should be well aware of the responsibilities regarding payroll; paying your employees, paying taxes, and filing the correct forms. With this information, it’s time to decide which payroll system you would like to set up. Typically, you have four choices:

  • Do it yourself by hand – this keeps payroll in your hands, but is extremely time-consuming.
  • Do it yourself payroll software – this gives you the ability to quickly pay employees and manage taxes, but you’ll need to use the software properly.
  • Hire an accountant – the main benefit is that an accountant is familiar with payroll responsibilities, but this gives up control and can be costly.
  • Outsource payroll – this can alleviate some of the workload, such as tax deposits and filings, but it can be expensive and you’re putting your payroll in someone else’s hands.

Regardless of which system you settle on, you should also have the following in place:

  • Complete an I-9 form. This will verify the legal status of your employees. Your employees must also fill out a W-4 for tax withholdings.
  • Giving your employees the choice to either get paid by check, or direct deposit.
  • Reporting earnings and withholdings of each employee and total withholding amounts to the correct tax agencies on time.

If you opt to establish and start setting own payroll system for your business, here’s what you’ll need to get started:

Have an Employer Identification Number

Apply for you employment identification number by contacting the IRS or online. Your EIN, also known as an Employer Tax ID or as Form SS-4, is important because it’s required when reporting taxes to the IRS.

Find Out If You Need State/Local Ids

You may need a business ID in certain states in order to pay process taxes. You see if your state requires an ID by visiting the SBA’s State Tax Guide. This guide is also helpful since it also provides state information on taxes like worker’s compensation, unemployment, or business tax registration.

Know the Difference Between an Employee and Independent Contractor

There can be major differences between how you pay employees and independent contractors. Knowing how these two types of employees can affect your payroll is important to understand. The IRS has an informative page that can help you understand how employees and independent contractors differ.

Settle on a Pay Period

In the United States, the most common pay periods are at the end of the month, semi-monthly (twice a month – on the 1st and the 15th, or on the 15th and 30th), biweekly (every two weeks) and weekly. Since accountants run monthly reports, they prefer semi-monthly periods, which would be 24 throughout the year. Benefits are also monthly, so if a semi-monthly pay period makes these deductions easy to manage.

Biweekly pay periods are preferred by hourly employees and overtime can be calculated easily. Since semi-monthly pay hourly employees at 86.67 hours per period, calculating overtime can become a bit more complicated.

Weekly pay periods are favored most by the trade industry, such as construction. Most other businesses tend to avoid weekly pay periods because they’re expensive, vendors charge for each payroll process, and it’s time consuming.

Besides finding the pay period that works best for your business, also consider your state’s law regarding pay periods.

Document Employee Compensation

As mentioned earlier, having precise payroll records are a necessity. Make sure that you have a system in place to accurately track employee hours, how you handle paid time off, employee compensation, and business deductibles. This guide on Employment and Labor Law can be used to direct you in this area.

Manage and Organize Records

There are federal and state laws the require you to keep certain records for a certain amount of time. For example, W-4 forms must be kept for all active employees and for four years after they leave your organization. You should also keep W-2’s and copies of tax forms and dates.

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