A Step-by-Step Guide to Setting Up a Payroll System

Step six: Establish payroll records. For federal tax purposes, you must keep the following information on file:

• the name, address and Social Security Number of each employee
• the total amount and date of each payment
• the portion of each payment that constituted taxable wages
• copies of each employee's W-4
• dates and amounts of tax deposits
• copies of returns you filed
• copies of any undeliverable W-2 forms

Step seven: Decide if you will pay workers for time spent in orientation, sick days, meals or working from home. Your state department of labor can tell you if you are required to pay for this time.

Step eight: Check your local overtime rules. According to most state laws, any work that exceeds 40 hours per week must be compensated with at least one and a half times the employee's hourly wage. Read Which Employees Are Exempt from Overtime Regulations? to determine who in your company is exempt from overtime pay.