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How to Set Up a Payroll System for Your Business: 2022 Guide

So, you’ve started a new business, but you’re no accountant. Or maybe your established venture needs to update its payroll system.

And you’re an entrepreneur, not an HR specialist.

Setting up payroll for a small business is a crucial step. Paid employees are happy employees, right? And there are so many interconnected parts, from benefits to salaries to taxes. It’s also important that whatever system you choose functions well for your type of enterprise.

But accounting software and payroll systems don’t come naturally to everyone who starts their own company.

How best to go about it? Read on.

What Is Payroll?

Payroll is a loaded term, meaning different things to different people. On the one hand, it’s the amount of money your business needs to pay out to staff in compensation. As in, That company pays out millions every week in payroll.

On the other, it’s the actual system by which you remunerate your employees. Many large companies have a whole payroll department, where staff runs software and processes payments. This is when the boss responds to your question, Go see payroll.

Susan S. Lewis CPA sure once you understand what payroll is, you can get down to business setting up your system.

How to Set Up a Payroll

Setting up a payroll system for a small business is a complex process with multiple steps. These may vary a bit depending upon the size of the company and the type of venture it is. You might need to know how to set up payroll for LLC type entities or create a system that works for a cooperative or a sole proprietorship.

The steps below will get you started.

Get Your Employer Identification Number

 Employer Identification Number

The first thing you’ll need to do is get an employer identification number or EIN. This is a code used by the federal government to identify your particular business. When you report tax information for your employees, for example, you’ll include your EIN.

This is an easy step that just requires you to log onto the IRS website. Best of all, it’s free.

Find Out Your State Business Requirements

Next, you’ll have to register at the state level. Every state has different requirements and its own procedure. Some states do their best to streamline the process, others, well, don’t. Some don’t even bother with a state ID. The Small Business Administration has a handy guide that answers the question: how to do payroll for my small business for every state in the nation.

Understand the Difference Between Individual Contractors and Employees

It’s important that you know the difference between employees and contractors. The popular conception is that this comes down to whether the individual in question receives benefits. And benefits are indeed a factor, but it’s only one of several considerations.

Others include whether the employee or the employer controls where, when, and how the work gets done. In other words, do they work from home when they can or come into the office on a schedule? This can be confused with the prevalence of remote work these days.

Another factor is who’s in charge of any expenses required and the length of the relationship. Contractors typically handle a lot of their overhead and work for set lengths of time.

The IRS has a handy guide that will help you decide what works best for your payroll.

Collect Employee Tax Information

When you bring on employees, you have to collect basic information to enter them into payroll. Required documents include:

  • IRS W4 Form. This form determines how much taxes should be withheld.
  • State W4 Form. Each state has its tax document, similar to the federal W4.
  • U.S. Citizenship and Immigration Services Form I-9. Each employee must prove their residency and eligibility to work in the U.S.
  • Direct Deposit Information. Many employees prefer to have their checks deposited right into their bank accounts and this form facilitates that.

Determine Your Payroll Schedule

Next, you’ll need to figure out how often you want to pay your employees. The most common options include:

  • Weekly. Once a week, usually on a particular day.
  • Biweekly. Every two weeks, again on a set schedule.
  • Semi-monthly. Checks are cut twice a month on set dates, for example, the first and the fifteenth.

Create a Payroll-Related Process

You’ll also need to establish how you want to track the time of employees. In other words, are they going to be salaried, will they submit timesheets, or will you use software to log their hours? There are other options, of course.

Benefits, time off, and other policies will also have to be set up at this point. You’ll also need to consider the backend, which is how to keep track of taxes and benefits paid.  

Choose Payroll System and Decide Who Is to Run Your Payroll

Payroll

Selecting a good payroll system is next, and there is a wealth of software options. So many, in fact, that it can be hard to figure out which is the right one for you. You might want to find someone who knows how to do payroll for a small business, in other words, an HR administrator. Having a specialist who can help you find the right system for your business – and who knows how to run it – will make things much easier.

Calculate Your Employees’ Gross Pay

An employee’s gross pay is the total amount they earn each pay period before taxes. For salaried employees, you simply divide their annual compensation by the number of pay periods. With hourly workers, you multiply hours worked by the rate at which you pay them. Again, this is all before any withholdings or benefits are taken out.

Calculate Withholding and Deductions

Once you know gross pay, you’ll need to establish how much is taken out of each employee’s check-in withholdings and deductions. These include taxes, Social Security, health insurance, and other benefits. Specialized software makes the process straightforward, and our specialists at Lewis CPA always use such software.

Withhold, Report, and Pay Payroll Taxes

As the employer, it’s also your responsibility to handle taxes. Your payroll system has to withhold, account for, and pay taxes. These include income, Social Security, Medicare, and state taxes. You will also likely have to process and pay federal and state unemployment taxes and insurance. Again, the software can help you keep track of due dates and make scheduled payments.

Keep Payroll Records

It’s imperative that you archive all payroll records. This makes it simple to resolve any disputes with employees, fix mistakes, and keep the IRS happy. It’s also common sense in today’s litigious society. And it’s a simple task with digital technology. The software outputs records, and you can easily store and access things at will.  

Hiring an Accountant to Manage Payroll

If this all seems a bit much – you’ve got a company to build! – you might want to consider hiring a specialist to run and administer your payroll. A professional, like those at Lewis CPA, will be well versed in the latest software, taxation laws, government regulations, and other considerations. And while you’ll have to pay them for their help, the cost savings will likely pay for themselves over time. Not to mention the peace of mind that comes with professional help. Contact us!

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