How to Set Up a Payroll System for your New Business

No matter the size of your business, whether you have 1 employee or 100, having a payroll system in place is crucial to staying prepared with all legal and mandated responsibilities with being an employer. The benefit of software that assists with payroll is that it will save you time and help shield you from penalties given out by the IRS. As a new business owner, payroll probably isn’t the biggest thing on your mind, so that’s why setting up a payroll software will get a lot of the busy work out of the way – allowing you more time to focus on more pressing needs and decisions for your success. So where do you start with the set up?

1. Acquire an Employer Identification Number (EIN)

By applying for an EIN with the IRS either online or directly, you are then allowed to hire employees to legally work for you. Oftentimes this EIN is referred to as an Employer Tax ID or as Form SS-4. The EIN is needed for reporting taxes and other documents to the IRS. You will also use the EIN for reporting information about your employees to state agencies.

2. Check your state and local government requirements

In some states and local governments, you are responsible for obtaining other ID numbers to process taxes in your area. For instance, in Michigan only some ventures are required to register for a state license based on their industry. 

3. Understand whether you hired contractors or employees

Knowing the distinction between an independent contractor and an employee is important because there are different actions needed with the two. The line between the two is often very blurry, but it affects the way you will need to withhold income taxes, Social Security and Medicare taxes, and how you pay unemployment taxes. See if you have an employee or independent contractor here.

4. Collect paperwork with new employees

Any new employees that you hire must fill out a Federal Income Tax Withholding Form (W-4). Have the employee complete the W-4 and return to you so you know the correct amount to withhold from their paycheck each pay period.

5. Choose a pay period

Selecting a pay period that works for your business and employee needs is important. Whether you decide to pay weekly, bi-weekly, semi-monthly, or monthly, realize that the more times a month you do process will cost more, but will keep employees happy. Depending on your state, there may be an enforced pay period without election available. Learn more about different pay frequencies here.

6. Decide how you want to compensate time off for employees

Paid time off for your employees isn’t a requirement, but it is something many businesses offer and a benefit that many employees look for when applying to jobs. If PTO is a fringe benefit that your company will offer, you will need to create a PTO bank for your employees so it’s not coming out of their regular pay. This also applies to other forms of compensation such as volunteered time off or sick pay.

7. Set up your deductions for employee paychecks

Don’t forget about business deductibles like 401k and health care premiums. Gathering this employee info to withhold pay to the appropriate organizations is essential for business owners.

8. Select a payroll system that’s a good fit for your business

Whether you run payroll in house by hand, with a third-party CPA, through an installed program, or with a cloud-based payroll system, selecting the right process for running payroll will need to be sorted out. Payroll administration takes a lot of attention to detail, otherwise it will need to be re-run to correct mistakes, and that can take up valuable time and unnecessary spending. Be sure your method is saving you money, even if it means spending money upfront to save you larger amounts in the long run.

Source: Small Business Administration

If you’re in the process of starting a new business and are weighing your options for how to run payroll, consider Dominion Systems cloud-based software for your company.