Business owner using a calculator and laptop to handle payroll

How to set up payroll for small business

Estimated reading time: 5 minutes

Learning how to set up payroll for small business marks an essential first step in establishing your company. When this is taken care of, you can ensure overall business compliance and accurate, timely payments for your employees.

It goes without saying that your employees must be paid regularly. The key is implementing an efficient payroll system that’s dependable and easy to operate. This way, you have a much more accurate grasp of your labor costs, as well as a documented record of each employee’s service to your company.

Here are a few key starting points to consider, as well as details on how to scale up payroll once your business really gets rolling.

Become familiar with state and federal employment laws.

Every business owner should have a basic understanding of laws and regulations governing employees and payroll. State laws may vary, so make sure you find out what’s applicable in the state where your business is located. The U.S. Department of Labor (DOL) website offers helpful information on federal wage laws.

Important labor-related laws include:

  • Fair Labor Standards Act (FLSA)
  • Equal Pay Act
  • Federal Insurance Contribution Acts
  • Workers’ Compensation
  • Federal Unemployment Tax Act

A detailed explanation of each law can also be found on the DOL website.

Business owner using a calculator

Complete and submit essential employee tax forms.

Certain state and federal tax regulations are key elements of any company’s payroll system. By complying with these regulations from the start, you can avoid costly penalties or other legal actions that no business owner wants to face. Read on for the information and documentation you’ll need.

Employer Identification Number

To process payroll, it’s mandatory that your business obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This serves as your employer tax identification for use wherever business tax forms are involved. You can apply online for your EIN form.

Certain states may also require businesses to file state income taxes (withholding, unemployment, etc.). You may receive a state ID number for payroll purposes, similar to your EIN.

Tax forms

After receiving your EIN, compile tax information from your employees. For both current workers and new hires, key forms include:

  • W-4. This determines the amount of federal income tax to deduct from each employee’s paycheck.
  • Form I-9. This serves as proof that your employees are legally authorized to work in the U.S. Employees must submit authentic types of identification, copies of which should be maintained in your files.
  • Social Security verification. This process helps you keep clear, accurate records of your employee’s Social Security status. The service is free and you can register here.

If you outsource work of any kind, contract workers must complete a 1099 form, which you will, in turn, submit to the IRS.

Filling out business paperwork

Classify employees as “hourly” or “salaried.”

Here’s an area where employers sometimes slip up and neglect to properly classify their employees. It’s good to be careful, seeing as government regulations like the FLSA are involved, and penalties for misclassification can be costly.

For hourly workers, the DOL notes, “The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.”

Salaried employees are paid for a full-time position, generally on a monthly or bimonthly schedule, at a fixed amount. Generally speaking, these employees are not covered by FLSA requirements, nor do they receive overtime pay for working extra hours.

Build consistency with a payroll calendar.

When setting up payroll for small business, consistency is key. This is true for both employees who depend upon regular compensation and for your company’s accounting purposes. Some businesses prefer weekly or biweekly payroll schedules, whereas others maintain a monthly or semi-monthly payroll calendar.

A lot depends upon the status of a company’s cash flow, but it’s important to establish a regular payroll schedule and a clear payroll policy (which can be outlined in detail in an employee handbook).

Enter and manage payroll data.

Few other priorities are as critical as the accurate entry and management of your payroll data. If you run a solo or very small business and are therefore responsible as owner for payroll data management, don’t take chances! Make sure another responsible individual looks over the data you enter into the records for any mistakes that might otherwise prove damaging later on.

Business owners doing accounting work

Be scrupulous in maintaining payroll records.

Keeping a close eye on the payroll records your business generates not only helps keep things running smoothly; it’s also required by law. To remain compliant with IRS rules, businesses generally maintain records on employee taxes for as long as four years. This may prove cumbersome if you rely solely on paper records, but paper can serve as a useful safeguard if and when you use payroll software instead.

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Be prepared to scale up.

What happens to payroll management when your company experiences significant growth? Many small businesses opt for the use of payroll management software. These systems are designed to be user-friendly and cost-efficient, potentially saving a company considerable amounts in terms of time and resources. When looking for the right software, ensure that the following requirements are met:

  • It is compatible with other human resources systems currently in place.
  • It offers features relevant to your business, like managing employee benefits and paid time off.
  • It can be easily integrated with accounting software.

Another option: cloud-based payroll providers. This third-party alternative enables business owners, as well as supervisors and employees, to enter payroll information from mobile devices or other connected technology. These providers usually offer comprehensive tax filing and related services and are designed to scale up alongside your business.

Whether you’re about to hire your first employee or already have a thriving workforce, knowing how to set up payroll for small business is a key item on your “to-do” list. Research employment laws, become familiar with tax requirements, establish a payroll calendar and policy and make sure the proper forms are submitted. This way, you’ll be ready to scale up payroll and better support your growing business.