How to Set up Payroll for Your Small Business: The Complete Guide

Payroll is a very critical component of the financial system of any business. A sound payroll system enhances employees experience with business benefits and enables businesses to comply with employment legislation and satisfy all tax obligations.

So now that we know how crucial payroll system is for a business, how do you set it up correctly for your small business?

Don’t waste another minute poking around the internet trying to figure out how to set up payroll. This step-by-step guide will set you straight.

Step 1: Review Federal, State, and Local Employment Laws

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First, head to the Federal and State Department of Labor websites and note all employment laws you’re required to follow. Some of the rules that might impact your business and payroll include the Family and Medical Leave Act, overtime rules and limits, tax payment timelines, employment tax rates, minimum wage laws, etc.

This is also a great place to check whether your state and local government require businesses to obtain separate tax numbers aside from federal employment identification number (EIN) — also known as Form SS-4 or Employer Tax ID.

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Step 2: Get a Federal Employer Identification Number (FEIN)

Next, apply for a federal EIN. An EIN, as the name suggests, is a unique identifier that state and federal agencies use to keep track of a business’s tax reporting. You can apply for an EIN on the IRS site or via fax, mail, or telephone.

Step 3: Independent Contractor and Employee: What’s the Difference?

The employment status of your staff will significantly impact how federal and state taxes will be paid and withheld, so make sure you know the difference between an independent contractor and an employee.

Step 4: Choose Your Payroll Schedule

Next, choose how often you wish to run your payroll. Payroll schedules fall into four categories: weekly, bi-weekly, semi-monthly, and monthly. Pick a schedule that suits your budget as well as your current and future needs.

However, your payroll schedule may also be influenced by state law. So be sure to check your state’s business resources to ensure your proposed payroll schedule complies with set regulations.

Step 5: Develop an Employee Handbook (Explaining Your Payroll Policies)

Now that you know which employment laws you need to follow and the differences between an independent contractor and an employee, it’s time to develop your employee handbook.

An employee handbook, also referred to as an employee manual or company policy manual, is a book that explains every aspect of your business, including how your payroll is set up. Your handbook should be easy to read and contain no legal jargon.

Step 6: Stay on Top of Employee Paperwork

Once you find employees to staff up, make sure you gather all their payroll information and know which federal and state taxes you need to withhold. This will ensure there are no payment delays.

Step 7: Choose a Payroll System

Manually tracking employees’ benefits and taxes can be cumbersome. We recommend using a payroll management system. There are plenty to choose from.

A payroll system doesn’t have to be overly complicated. At its core, the system you choose should help you pay employees and taxes on time. It should also help you reduce bookkeeping and payroll errors.

Step 8: Choose a Payroll Admin

Who’ll manage your payroll system? If you decide to hire someone to do it for you, make sure they’re experienced and have a background in finance or accounting.

Step 9: Running Payroll

Once you’ve set up your payroll and have hired your first employee, you can start running payroll. Correct any errors that you may encounter, and be sure to keep all your payroll records for IRS purposes.

Over to You

Payroll is not a fancy business tool or a nice-to-have, but it’s a Must-Have if you want to turn your business into an income-generating powerhouse. Use this guide to create the perfect payroll for your business.

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