Small business owners know that setting up payroll is something you want to get right the first time. Getting some payroll software can certainly help, but before you look for it, there are a few preliminary steps it would behoove you to take.
Steps to Setting Up a Payroll System
Letโs go over those right now. If you donโt set up your payroll correctly, itโs likely going to mean many headaches down the line.
Register All Necessary Accounts
Gathering all the necessary payroll information is going to be the first step of this process. For most businesses, youโll need to register your stateโs new hire reporting account. Youโll have to register your workers compensation coverage and any necessary state tax accounts, such as your unemployment tax account.
Youโll need to set up an Electronic Federal Tax Payment System account for paying federal taxes, sometimes abbreviated as EFTPS. Youโll also have to register your Employer Identification Number, or EIP.
Once youโve done all this, youโll be able to input all the ID numbers into any of the complete payroll solutions you might purchase, such as a ready-made or a proprietary software suite.
Have Your Employees Fill Out Their W-4 Tax Forms
Next, youโll need to collect all relevant employee information. What info you need from each employee will depend to some degree on your business model.
At a minimum, youโll want each employee to fill out a W-4 tax form. This is what youโll use to determine how much money in taxes each employee wants you to withhold. Depending on your businessโs location, some of your workers might have to complete out-of-state tax withholding forms.
Once you have those W-4s, you can feed them into the payroll services software youโve acquired. That software can automate the sending of tax information to your workers each year when tax time rolls around, saving your HR department from having to do it.
Set Up Employee Benefits
Next up, youโll set up your employee benefits. The details will depend on what exactly you offer your workers. Some will be required, and others will be optional.
For instance, you might offer your employees things like health insurance, disability insurance, or a retirement plan. They can opt in if they like, but they donโt have to. Things like FICA taxes and unemployment tax are not optional.
Make a Decision Regarding Overtime Wages
You will have to decide whether youโll make each employee eligible for overtime wages, and then youโll feed that information into your payroll software. If you want to make an employee exempt, you can only do that if the worker meets certain criteria.
They need to have job duties that make them exempt. They have to earn a salary, and they also have to make at least $35,568 each year or $684 per week. If your workers do not meet all three conditions, they are nonexempt, meaning you must give them overtime pay if they work overtime hours.
Choose a Salary vs. Hourly Pay Structure
Youโll need to determine whether it makes more sense to set up an hourly employee pay structure vs. salaried. There are positives and drawbacks with each option.
Presumably, the company heads will get together and work that out. Youโll also talk about it with each candidate before you hire them. In some industries, your workers can also collect additional monies such as tips or commissions, so you may want to consider that.
Select a Payment Frequency
Finally, you will need to choose a payment schedule. Many workers appreciate a weekly payday, but you might choose to pay them every two weeks or even once per month if that will better suit your business model.
At this point, youโll also need to determine how youโre paying your employees. Many businesses set up a direct deposit system for their workers, so the money goes right into their accounts. However, some employees would rather you give them a physical check each payday.
Now, you should have everything in place that you need for this critical business task. Once you have the right payroll software suite and youโre up and running, you should be able to avoid mistakes and achieve employee retention.
