Setting up payroll systems is one of the most important tasks that a small business employer should do at the time of establishing their business. Setting up a small business payroll system not only helps in identifying and streamlining the overall business process but also assists the business owner in delivering the various legal and regulatory responsibilities towards the Internal Revenue Service (IRS).
We believe the 10 steps mentioned below are a good start for any business owner on how to set up a payroll system for their small businesses –
- Employer Identification Number (EIN) – Get this first – Even before bringing their first employee on board, the small business employer should approach the IRS to get their unique employment identification number (EIN). Also, referred to as Employment Tax ID (Form SS-4). EIN is in many ways including reporting of taxes and other IRS documents, reporting about the employee to the state agencies. Business owners can apply for EIN online or by directly approaching IRS.
- State IDs or Local IDs? – Be sure what you want – As a small business owner you should know this, as many states (local) governments will need this ID for processing your taxes.
- Employee v/s Independent Contractor – Be very clear – From a filing taxes point of view there is a huge difference between a company employee and an independent contractor. Though not very clear in definition it is highly recommended to get this clarity from IRS itself as it affects how you file your taxes etc.
- Employee Paperwork – Make sure this happens on time – For All employees who are newly recruited it is mandatory that they fill Federal Tax Withholding Form W-4 and return it to their respective small business employers. The employer can use this to withhold actual income tax from their salaries.
- Payroll Schedule – What is best for you – Sometimes governed by state laws, determining payroll schedule whether monthly or bimonthly is also a building block in setting up your small business payroll system. As per the directives from IRS, the employer has to withhold the income tax even if the employee leaves before the time period.
- Employee Compensation Terms – Document Everything – Employee compensation terms should necessarily mention the paid time off, contribution towards health insurance coverage premium, and contribution towards retirement funds. You should also decide on how you are going to track the employee hours and how (if at all) you would pay employees overtime.
- Automate it – Payroll Software System – Decide among the options of getting payroll done as an outsourced service from a payroll services provider or getting it done in-house using a payroll software system. For choosing an in-house payroll software system, compare the various products against their respective features and their pricing model. Some of the solutions out there in the market charge annually while others use a monthly pricing model. Some are cloud-based solutions while others are standalone payroll applications. Also, consider the learning curve that would be involved in getting a hang of the software. While an in-house payroll system offers benefits in terms of greater control over the process, outsourced payroll service offers benefits in terms of cost-cutting as you don’t have to hire a payroll professional for doing it for you. Whatever you decide, as an employer you have to make sure that the payroll is run on time and payments are done duly with accuracy.
- It all comes down to this – Payroll Run – With everything in place, it’s time to run your payroll software. Be sure you have all the regulatory and legal checks in place and your payroll software is configured accordingly as per state and federal laws. You may now enter the information manually or hand over the data to your accountant.
- Maintain Records – Legally Speaking – Small Business Employers are expected to maintain certain documents regarding the employee for a specified time period. For instance Forms, W-4 is to be maintained for all current employees and should be with the employer for three years after the employee left the organization.
- Payroll Taxes – The Reporting – This is perhaps the most important reason for a small business employer to set up their payroll system – reporting. As a business owner, it’s your responsibility to submit various tax-related documents and forms to the appropriate authorities. For any doubts, it is recommended that you spend time with the IRS website and go through their Employer Tax Guide.