How to Set Up Payroll for Small Business

#1

Research Payroll Software Options

Every small business is different, so, before you make any decisions on software, it’s important to identify your specific needs. For example, how many employees do you have? What kind of tax compliance management oversight might your specific industry require? How much support do you think you might require? These are all factors to consider and questions you’ll need to investigate before you start comparing options.

Payroll software works by storing all critical payroll information - things like employee names, hire and termination dates, addresses, tax forms, federal and state withholding options, pay types, pay rates in one place. This information is used to calculate your employees’ pay and calculate payroll taxes in order to create and send payroll checks. The most powerful components of payroll software is its record keeping function and its ability to house all payroll data and due dates in one, centralized location.

But, payroll software and payroll services may differ, so let’s take a look at that next.

Payroll Software vs Payroll Services

When you purchase a subscription to a payroll software you’re responsible for making sure to enter the information correctly, complete all the necessary payroll tasks, and to meet state and government deadlines. So in essence, the software can help store and maintain a huge amount of data in one location; however, you’ll need someone — or even multiple people — to manage and oversee the process.

Some of the most popular payroll software companies on the market include:

• Intuit Quickbooks
• Gusto
• ADP
• Paychex
• OnPay

Many of these same companies that offer payroll software subscriptions also offer payroll as a service, meaning you offload all the oversight (managing deadlines, cutting checks, submitting forms, etc.) onto the payroll service company. But, in addition to a monthly cost, payroll services often charge fees for things like set-up, generating tax forms, paying employees in multiple states, just to name a few.

Only have one employee? That’s not a problem. Many payroll software services offer online payroll for one employee and smaller teams. But, whether you decide to manage payroll yourself or offload some of the process to a service, know that almost all of the legal information and filing requirements are the same whether you have one employee or hundreds. The only factor that may shift is how often you submit payroll taxes, but we’ll go over that in a little bit.

As you consider your options, here’s a few things you’ll want to keep in mind:

• Budget. When you make a business plan, your budget will help guide certain decisions, including the types of software and services you purchase. Make sure you have a good idea on the amount you’re able to spend each month on payroll. This will give you a better idea of whether to go with a self-managed software or if you can spring for a payroll service.
• Ease of use. Whenever you invest in any type of tool or technology, it’s important that it’s intuitive to use or at the very least, easy to learn. Unfortunately, most companies just don’t have the time to adopt or train employees on complex solutions, so make sure the product you choose is user friendly — or risk costly errors and inconsistent usage.
• Included services. If you don’t already have a payroll expert on your team, do a bit of research and outline the top features and requirements your company needs from a payroll software.
• Consider data transfer cost/requirements. If you already use payroll software and are considering making a shift, you’ll want to consider the cost of moving your data and the downtime that will require.
• Support. Inquire if the payroll software offers support and read reviews around customer service.
• Trial offers. It’s always nice to try-before-you-buy, so check to see which companies offer a trial period so you can see if it’s a good fit for your needs.

#2

Gather Critical Business Info

Once you’ve done your research, you’ll want to determine if you’ll have a team member(s) oversee the payroll processing, or if you’ll delegate that task to a payroll service. From there, you’ll need the following pieces of necessary information before you can begin processing payroll:

1. EIN. ​​An Employer Identification Number (EIN) or Federal Tax Identification Number is used to identify a business entity. If you don’t already have an EIN, you’ll need to apply for one online. An EIN is required to set up payroll for an LLC or any other type of business or corporation.
2. Business insurance. There are different types of insurance that help protect an employer from financial damage as a result of payroll errors, employee injury or illness, and instances in which workers’ compensation doesn’t apply. Make sure to check into the types of insurance that are necessary for your company which may include payroll insurance coverage, employer liability insurance, professional liability insurance, and general liability insurance.
3. Necessary business IDs. Your business location will determine the local or state business IDs needed for setting up payroll in accordance with your regional tax requirements. Get in touch with local government officials to confirm if any additional tax ID numbers are required.

#3

Set Up a Payroll System

Now that you’ve done the prep work, you’re ready to create a payroll processing system. The real meat and potatoes of your payroll system is employee info. There is a lot of info to collect and have at the ready, which we will go over here.

H3 Collect & Enter Employee Info

Before an employee can begin work, they must fill out some of the following forms:

• W-4: This is an employee withholding certificate which lets you know the correct tax amounts to withhold from the employee’s paycheck, OR
• W-9: This is used for independent contractors (contractors are responsible for their own tax withholding), AND
• I-9: This form verifies that the employee is eligible to work in the U.S.

You will also need the following information for each employee:

• Full name
• Date of birth
• Social security number
• Current address
• Employment start/end date
• Compensation amount

Finally, you’ll want to classify the employee based on their employment and pay status. Why does this matter? Misclassifying an employee as an independent contractor instead of a full-time employee could mean paying costly back taxes you didn’t account for during the year. So, if you’re planning on hiring a freelancer or two, calculating payroll will function differently for these individuals than if you were only managing full-time employees. If you’re new to payroll, it could be helpful to learn more about freelancers and employee classification practices.

Some common classification types include:

• Hourly
• Salary
• Commission-based
• Part-time
• Full-time
• Exempt
• Non-exempt

Automate Employee Data Collection

The onboarding process can be tricky because there’s a lot of information and cooperation required. The good news is you can streamline onboarding with the integration of employee text alerts and drip campaigns which can both notify and remind employees when they need to complete a task.

Research has shown that 90% of people respond to a text within 30 minutes. So, instead of playing the dreaded waiting game with your inbox, move new hires through the process more efficiently with automated SMS reminders, employee text alerts for required paperwork, and trackable links to HR information packets.

Reduce HR & Employee Operations need to send repetitive emails for timecards and expense reports by sending automated SMS reminders via an employee texting system.

#4

Set Schedule & Process Payroll

Next, you’ll want to choose your payroll schedule. This could be weekly, biweekly, or monthly. This will depend on state requirements, business cash flow, and what works best for your team. Keep in mind, employee pay dates aren’t the only ones you’ll need to set up in the system. Make sure to schedule tax payment due dates and tax filing deadlines as well.

If you’re not outsourcing payroll processing to a payroll service you’ll need to do a few other things as well:

Calculate Small Business Payroll Taxes

Around pay day, you’ll need to determine which federal and state taxes to withhold from your employees’ pay. The IRS has a Withholding calculator on their website which can help you calculate these figures manually. However, if you’re using payroll software, chances are this will be automatically calculated for you— just make sure you’ve done your due diligence and classified your employees correctly.

Submit Payroll Taxes

When it’s time to pay taxes, you need to submit your federal, state, and local tax deposits. The timing of payroll tax deposits depends on a few things:

• The size of your company’s payroll
• The lookback period
• IRS Form 941
• Quarterly wage and tax statement

If you have more employees, the schedule for your payroll deposits may be semi-weekly. But, if you only have one or two employees on payroll, it could be monthly. Make sure to do your research and schedule your payroll deposits accordingly.

File Tax Forms

Each quarter you’ll send in your employer federal tax return along with any state or local returns, as applicable. Finally, prepare your annual filings and W-2s at the end of the year.

While there may be some other steps and considerations depending on your industry and company type, this is the basic process for setting up and managing your small business payroll.

Best Practices for Effective Payroll Management

And finally, once you’ve set up your system, there’s a few best practices you’ll want to keep in mind to make sure payroll continues to run smoothly:

• Update your software regularly
• Implement cloud security
• Collect time and attendance records on a weekly basis
• Set notification and reminders for critical due dates
• Include payroll details in new-hire packets
• Clearly communicate payroll changes to employees
• Audit your payroll system on a quarterly basis