Setting up payroll for small businesses is very important once you own a business and hire employees.
As a business owner, you’re responsible for issuing paychecks on a set schedule and deducting and paying federal, state, and local income taxes to the government. With a payroll system, execution of this task becomes easy.
Starting a payroll includes setting up your business as an employer to pay your employees, tax agencies, and other applicable entities. You need to understand the overall process to learn how to do payroll yourself.
Doing payroll includes business owners being well-versed in the product or service they offer. However, not everyone has the knowledge or time to tackle all payroll operations.
How to Start a Payroll for Small Business
1. Establish Your Business as an Employer
The first step is establishing your business and applying for the required licenses.
Ensure that your business has met all the legal requirements to operate as an employer.
Here are some of the steps to take to establish your business as an employer.
- Apply for an Employer Identification Number (EIN).
- Confirm your state tax identification number is the same as your federal one.
- Sign up for an account with the Electronic Federal Tax Payment System.
- Start a bank account solely for payroll transactions different from your primary business account.
- Sign up for any applicable state electronic tax payment accounts.
- Purchase workers’ comp insurance; most states require it.
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2. Establish Your Payroll Process
In the process of starting a payroll for a small business, you will need to deduce what will work for your business so you can ensure your team is trained on the process correctly.
Ensure to consider the needs of your employees and your business, plus any legal requirements.
However, you should consider whether you want to use a payroll solution to make the process easier.
3. Obtain Your Employees’ Payroll Forms
Once you hire an employee and are ready to start work, you need to obtain some important payroll documents.
These documents include tax and work authorization forms, which the employees need to sign.
You’ll also need to register your employee in your state’s New Hire Reporting Program within 20 days.
Meanwhile, ensure that you report all new or rehired employees to your state.
To determine how much you need to pay, you will need to collect data on your employees’ work time.
Also, you’ll need to find the total hours worked for the period if you’re paying hourly employees.
Salaried employees commonly receive the same pay each period, and you can still track their work hours for visibility if needed.
Most businesses begin with a simple timesheet and often move up to a time and attendance system or time clock to manage employee schedules, break time, and hours worked as they grow.
5. Payroll Calculations
You can start figuring out the important payroll calculations as soon as you know how much an employee has worked for the pay period,
These payments include gross pay, taxes due, deductions for insurance premiums and other benefits, and net pay.
Here’s a list of potential deductions to determine what to deduct for each employee.
- Social Security and Medicare (FICA)
- Federal unemployment tax (FUTA)
- Deductions based on:
- Benefits you offer employees, like health insurance
- Tax deductions based on employee tips
- Miscellaneous deductions such as a uniform expense.
To process those deductions, you need to add all the deductions for each employee to get a total, then subtract that total from the employee’s gross pay.
6. Pay Employees, Tax Agencies & Benefits Providers
Once you can subtract deductions from gross pay, you must know the net amount you need to pay each employee.
This includes totals for employment taxes and benefits you need to pay out.
Follow the payment schedule you initially set, so employees always know what to expect.
Many employers must pay taxes, and benefit providers have their due dates. These expenses can vary every month. However, you’ll need to pay out the amounts you withheld from your employees’ paychecks plus any employer payroll tax and premium amounts your business owes.
Additionally, you should check before making any payments to determine whether you have enough funds in your payroll bank account. Nevertheless, spending more money than you have can result in unnecessary fees and litigation.
7. Do Year-end Payroll Tax Reports
Towards the end of the year, you’ll need to prepare to distribute year-end payroll tax reports. That said, employees must receive their W-2 forms by Jan. 31 of the following year.
The forms must indicate their total earnings and taxes paid. If you’re paying independent contractors, you may need to prepare 1099 NEC forms, as this will show earnings but no taxes.
8. Document & Store Your Payroll Records
You’ll need to document specific data for each pay period to comply with federal labor laws.
These include retaining payroll documents—like timecards, pay stubs, and any information regarding pay increases.
Requirements to Start a Payroll
Starting a payroll for a small business is easy, but it comes with a new set of challenges.
Terms like “business structure” and “EIN” might bring about a few confusing emotions that are the opposite of the delight you’ve felt.
Here’s what you’ll need to start a payroll
- Get an EIN
- Obtain a local or state business ID (optional)
- Get down your team’s info
- Classify your employees
- Choose a pay period
- Pick a payroll system
You have to learn to process payroll on time.
On-time payroll payment keeps employees happy and keeps you from making mistakes like overpaying employees if you’ve rushed through payroll.
Many states have requirements about how soon you must provide the final paycheck to a departing employee.
So, it’s good to be in the habit of sticking to a regular payday every month.
Also, ensure to meet the IRS deadline for payroll taxes so you don’t get fined by the IRS’s 10% Failure to Deposit Penalty.
You also need to pay city and state payroll taxes on time throughout the year, too.
Else, you risk getting hundreds or even thousands of dollars in additional fines from local tax agencies.
Here are tips on how to complete the forms
- Be detailed and fill out payroll forms correctly
- Before you submit your payroll taxes.
- Make sure you line up all the columns and lines, then triple-check to ensure each line item corresponds to your financial statement and payroll reports.
- Maintain clean payroll records each time you run payroll.
- More so, you’ll have to withhold federal income tax, Medicare, and Social Security from your employees’ pay.
- You’ll need to file Form 941, the Employer’s Quarterly Federal Tax Return, to report how much you withheld each quarter.
- Organize a secure place to keep up to four years of I-9 forms, W-2s, and W-4s.
- State new hire forms and copies of your filed tax forms (Form 941, Form 940, and state tax forms).
- You’ll also need to conserve the dates and amounts of all tax deposits, timesheets, and pay stubs.
- Keep everything on file for all active employees and file for at least three years after an employee is terminated.
- Also, check with your state labor office and double-check federal laws to make sure you’re keeping track of everything that’s required.
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The process involved in setting a payroll for all employees is the same as for one employee.
However, here are some quick tips to set up payroll for an employee.
- Apply for an Employer ID Number which identifies you as a business entity responsible for paying payroll taxes to the government.
- Get the Required Paperwork from an Employee.
- You will also need to have the employee fill out a Federal Income Tax Withholding form to allow you to withhold the right amount of income tax from their paychecks.
- Decide the time you will pay the employee
- Determine how often you’ll issue paychecks.
- Decide the type of payroll system to use.
- If you’re a small business owner, time is your most valuable asset. As such, you have to choose to automate the payroll process with an online service.
- After setting up your system, use a desktop program to enter the required information and print out the checks.
If you choose an online payroll service, you enter the hours and either print the checks yourself or use the free direct deposit feature.
The next thing is to report the payroll taxes to the appropriate tax agencies and pay them within the required period.
How to do Payroll Manually
If you will like to set up a payroll for small businesses manually, here is what you need to know.
Manual payroll is the process of paying employees their after-tax wages using human calculations instead of an automated method. Many businesses use payroll software to facilitate their payroll, yet, manual payroll is still a popular option.
This is because it is cheaper and relatively simple for anyone with a financial background.
So, let’s dive into how to set up a payroll for small businesses manually.
#a. Get your employees to fill out a W-4 form.
A W-4 form is an Internal Revenue Service form that documents an employee’s status so that the employer can deduct the correct amount of federal income tax from their paycheck.
If you are outside of the United States, you may contact your federal government; probably, they have a similar form that must be completed when a new employee is hired. Ensure you file this form as soon as possible.
#b. Ensure your business is registered and has an EIN.
To legally employ people and deduct taxes, your business must be registered with the government.
When you register, you get a number called an Employer Identification Number (EIN).
This number helps the tax agency recognize who an employee works for when they file their income tax at the end of the year.
#c. Decide on a pay period.
While some businesses pay their employees at the end of every week, you may decide to pay every two weeks or at the end of every month.
Ensure that the frequency and timing of payroll is organized to fit typical cash flow highs and lows.
#d. Carry out a way to track compensation.
You will need a way to track hours, and vacation time, to ensure that your payroll is accurate at the end of each pay period,
Most businesses do this electronically with time-tracking software that employees use to sign in and out at the end of each shift.
If your employees are on a set salary, you need to ensure that you record any unpaid time off that they take during a pay period.
The process of setting up a payroll for one employee is the same as setting a payroll for a team of employees.
To start a payroll for a small business, you need to get an EIN, get a local or state business ID (optional), get down your team’s info, categorize your employees, choose a pay period, and pick a payroll system. If you find the process daunting, you can employ professional services to carry out the process on your behalf.
FAQs about Payroll For Small Business
How do I set up payroll for one employee?
The process involves setting up a payroll for one employee is the same as setting up for a group of employees.
However, it would help if you decided whether to do it manually or employ the software.
Can I do payroll Myself?
You can set up your payroll manually.
However, if you’re unsure how to do payroll yourself, you can use payroll software that reduces the risk of errors or fines.
What do You Need to Set Up a Payroll?
To see up payroll for small business, get an EIN, contact a local or state business ID (optional), get down your team’s info, categorize your employees, choose a pay period, and pick a payroll system.
How can I do payroll myself for free?
To see your payroll for free, you need to register with the Electronic Federal Tax Payment System (EFTPS).
The Electronic Federal Tax Payment System is a free payment system that allows you to pay your federal payroll taxes and federal unemployment taxes right from your computer.