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How to Set Up Payroll for Your Small Business in 6 Easy Steps

November 4, 2024

How to Set Up a Payroll for Small Business: 6 Easy Steps

Setting up payroll may not be the first thing on your mind when you start a small business. However, as soon as you hire your first employee, you’ll need an effective payroll system.

This article will show you how to set up payroll for your small business.

Here’s What We’ll Cover:

What Is Payroll?

How to Set Up Payroll for Your Small Business

Wrapping Up

More Payroll Resources for Businesses

What Is Payroll?

Payroll is a process for managing all payments to your employees. It includes the full names of your employees, their salaries plus employee compensation information, your payment schedule, and payroll tax returns.

Every small business requires payroll services to ensure timely salary disbursement, handle tax filings, and maintain organized financial records.

How to Set Up Payroll for Your Small Business

Understand the State and Federal Employment Laws
Decide on a Payroll Schedule
Draft a Payroll Policy
Apply for Your Employer Identification Number
Choose a Payroll Administrator for Your Business
Sort Out the Employee Paperwork

1. Understand the State and Federal Employment Laws

The payroll process begins with understanding various state and local laws that apply to small businesses. Before you set up payroll for your company, you need to get familiar with relevant laws in the U.S. Different federal and state regulations apply in this case, such as the minimum wage laws, employment tax rates and, the Family and Medical Leave Act.

An excellent place to start is the U.S Department of Labor website. Here, you can access different resources to help you understand and comply with the federal employment laws. You also need to know the payroll rules regulating local businesses in your state.

2. Decide on a Payroll Schedule

A payroll schedule is a calendar that shows how often a business remunerates its employees. While some small companies pay their employees within a weekly or bi-weekly pay period, others choose to make direct disbursements on a semi-monthly or monthly basis.

It would be best if you did not choose a payroll schedule off the top of your head. First, go through the relevant laws—are there any specific regulations dictating how often you can pay your employees? Another thing to consider here is your business cash flow. If the bulk of cash inflow happens at the end of the month, you should consider fixing a monthly payroll schedule.

Many state and federal income tax laws frown against late salary payments, so be sure to choose a pay period you can easily keep up with.

3. Draft a Payroll Policy

After fixing a pay period for your business, you should create a payroll policy or employee handbook. An employee handbook is a formal document that spells out the different guidelines for managing business payroll, including the payroll schedule, employee benefits, and payroll method.

Drafting a payroll policy is one of the essential steps in this setup as it helps business owners avoid several liabilities. Payrolls impact employees directly, so they need to have first-hand information about how the business plans to manage the process and if their benefits are affected in any way. A detailed employee handbook helps companies to process payroll effectively.

A payroll policy is not a legal agreement between a business and its employees, so it should not read like one. Ask an employment law expert to review the document and make sure everything’s in place before sharing it with your workers.

4. Apply for Your Employer Identification Number

As a small business, you already have a Social Security Number for filing your taxes.

However, you need an Employer Identification Number (EIN) for processing payrolls. Companies can apply for an EIN on the U.S. International Revenue Service (IRS) website.

Once an EIN is assigned to you, it becomes your employer tax ID, and you can use it when filling any business tax forms. Even if you are not setting up payroll immediately, you still need to have an Employer ID Number for different transactions.

Depending on the tax laws in your state, you may have to file state income taxes for your employee(s) too. In this case, you need to apply for state withholding and unemployment tax accounts. Some local governments assign separate ID numbers to businesses for payroll tax filing, so find out if these terms apply to you.

5. Choose a Payroll Administrator for Your Business

Administering payroll is a lot of work, and many small business owners find it challenging to juggle it with their day-to-day responsibilities. You can assign this task to someone you trust in-house, outsource it to an accounting and bookkeeping service, or use payroll software like Gusto.

It would be best if you weighed the pros and cons of each option before making a choice. For instance, an online payroll processing platform will automate most of the tasks so you can have more time on your hands. Alternatively, payroll service providers are quite expensive, but they can handle all processes with little or no input from the small business owner.

6. Sort Out the Employee Paperwork

To complete the payroll setup, employers need to collect some details from new hires and update the payroll information of existing employees. These pieces of information include:

A Completed W-4 Form to know how much federal income tax you should deduct from the employee’s paycheck on payday.
A Completed Form I-9 to ensure the employee is legally authorized to work in the United States. Here, your employees need to provide a formal means of identification, and you should keep copies of these documents.
Conduct Social Security Verification to avoid name and SSN mismatches. The Social Security Number Verification Service is free of charge; employers only have to register to use it.
Depending on the local laws in your state, you may have to file new hire paperwork with the relevant authorities.

Wrapping Up

Payroll seems complex at first, but you can get it right. The simple payroll tips in this article will help you set up payroll for your small business in no time.