How to Set Up a Small Business Payroll System

Setting up a payroll system for your employees may seem like an overwhelming task, what with the IRS cracking down on independent contractors and all the taxes you need to pay. But thanks to the myriad banks, software providers, and payroll services eager to help your small business, setting up payroll is simpler than ever.

Here are the steps to setting up a payroll system:

1. Get an Employee Identification Number (EIN), also known as a Federal Tax Identification Number, to be identified as a business entity. You can apply online on the IRS website. Check with your state to make sure you’ll need an EIN, and also find out whether you need any other important identification numbers.
2. Determine which of your employees will be salaried, which are part-time, and which are independent contractors. Your business does not have to withhold taxes on independent contractors.
3. Have everyone fill out a W-4 form from the IRS. This will include the person’s Social Security number, how many deductions the person will take, and other data. If in the future the employee wants to change their deductions or has a change in marital status, they’ll need to turn in a new W-4.
4. Will you pay employees once a month, biweekly, or weekly? Some states may have rules about pay periods. It’s most common for employees to be paid every other week, but if you sign up with a payroll company to handle paychecks for you, you’ll pay a fee every time checks are cut, so you may want to save money by paying once a month.
5. Are you paying salaries, hourly wages, or a per-project fee? What are your state’s rules for overtime pay? Do you pay for vacation time, sick leave, or personal days? Are you paying for any kinds of benefits? Is an employee contributing to a benefit plan such as health insurance premiums or a 401(k)? Is there a probationary period?
6. Employment taxes are complex and the most important part of the process. You need to withhold federal, state, and local taxes, plus the employee’s portion of Social Security and Medicare taxes. As a business, you’ll also be required to pay payroll taxes and employer liabilities for unemployment and workers’ compensation.
7. At this point, most small businesses either set up an in-house accounting system such as QuickBooks or outsource payroll to a bank or payroll accounting company. The systems make it easy and calculate what the taxes are and when they need to be paid. Support can walk you through the process and help you determine the information you need to set up your system.