How Do I Set Up Payroll For The First Time? The Employer’s Complete Guide
Jun 30, 2022 |
Here’s what you’ll need to take care of before setting up payroll
Steps 1–4 are all about preparing information before you can actually tackle payroll. Fortunately, you’ll complete most of these steps just once. Take a few days to gather the following details and register for the appropriate accounts:
Step 1: Get an EIN
Before you can hire anyone, you need to get an EIN (Employer Identification Number) from the IRS. In case the terminology gets confusing, people also often refer to EINs as an “Employer Tax ID.”
You’ll use your EIN to report taxes and other info to the IRS and state agencies. Apply for an EIN online.
Step 2: Get a local or state business ID (if necessary)
Some state and local governments require companies to have ID numbers for tax processing. Contact your local and state government officials to find out if you need an additional tax ID number.
We know it’s a little annoying, but once you’re done, you can proudly check that one off the list.
Step 3: Nail down your team’s info
Now that you’re becoming an employer, you’re going to be responsible for filing reports and taxes on behalf of your team. These are the details you’ll need to keep on hand for each employee or contractor you hire:
- Full name
- Employment start or termination date
- Tax filing number (Social Security number or EIN)
- Date of birth
- Current address
- Compensation details: Make sure you take the step of putting details about compensation in writing to prevent disagreements from popping up
- Form I-9 to verify employees’ eligibility for employment in the US
- A W-4 for employees (or a W-9 for independent contractors)
Keep in mind that gathering this info is just the first step. To stay compliant, you’ll also need to do things like submitting your employees’ I-9 form for verification.
But we’re talking about setting up payroll here, so let’s keep the focus on what you need to do to get your employees paid (and keep them happy).
Step 4: Classify your employees
Before you even think about adding up the payroll numbers, you need to figure out who’s an independent contractor and who’s a full-time or part-time employee. Even if this seems obvious, there are legal definitions of each — and differences between the two — that impact how much you actually owe them and how you withhold their taxes. If it’s unclear, the IRS will help figure it out for you if you fill out Form SS-8.
Why is it so important to classify employees correctly? Well, if you accidentally classify an employee as an independent contractor, for example, you wouldn’t withhold income taxes for them or pay any payroll taxes. That means you could get stuck paying back payroll taxes as a result of your mistake.
Not to mention, you could have to amend your taxes and potentially pay interest or penalties. According to an Economic Policy Institute report, studies of multiple states have shown that 10 to 20 percent of employers misclassify their employees as independent contractors. Since employees typically cost companies 25 to 30 percent more than contractors do, you want to be sure you get it right.
Similarly, the FLSA makes distinctions between exempt and nonexempt employees—in other words, those who aren’t eligible for things like overtime and those who are.
Now you’re ready to dig in
Congratulations! You’ve got all the information you’ll need to set up your payroll. Steps 5–7 will take you through the rest of the process.
Step 5: Choose a pay period
Payday’s going to be a day your employees cherish, but what day should it actually be? And how often should you have it?
There are three things you need to think about to choose the right payroll schedule:
- What’s required by your state? Check out this list of federal and state payroll resources to see if there are any constraints about when or how you can run payroll.
- When is it best for you? Payroll is the largest expense for a lot of small businesses. Will running payroll cause cash flow problems? Is there a period of time when it’s more convenient for you to run it? Before your employees pass Go and collect $200, set up your schedule in a way you’re comfortable with.
- What do your employees need? Don’t forget that payroll is all about taking care of your team. They basically give you their labor on credit, and it can be hard for them if they have to wait a month to get paid. Try to get a sense of their needs and what they prefer — especially if they’re likely to have cash-flow issues of their own.
Once you decide what your pay period will be, be sure to let your employees know so they can plan accordingly.
Step 6: Pick a payroll system
Will you use a pad and pencil? Or will an online service make more sense?
The business of actually calculating payroll can be a little tough, and small business owners spend between one and five hours a month trying to get it right.
You’ll want to research your options and make sure you set up a payroll method that will help you save time and enable you to get all the nitty-gritty details right. A payroll provider should be easy to use and made to grow with your business. Of course, the payroll provider should also fit within your budget.
When choosing the right payroll company, ask other entrepreneurs what they use and recommend, look at reviews online, and decide whether you want to handle payroll in-house or outsource it. Here are some questions to consider when you’re checking out your options:
- Is it easy to use? Payroll can be complicated, so you’ll want to be sure the payroll provider leads you through a seamless process. Here are a few signs you’ll have a smooth user experience: The platform works well on mobile devices, has an intuitive menu structure, and contains easy-to-read text, clearly labeled buttons, and appealing colors.
- Could I use it myself? Even if you plan to hire a bookkeeper, you should be able to use most of the features yourself. Ask the provider if it has a demo of the software, and navigate the service on your own. Do you understand the terminology? Do the features apply to your business? Does the provider offer a live-chat function and other help features?
- Can it grow with my business? Make a list of your current and future payroll needs, and check whether the provider meets them.
This is where EBC can help you! EBC has over 3,000 customers and we continue to strive to meet their HR and payroll needs. We offer two HR and payroll solutions that have easy-to-use features and make tasks go by much faster.
Step 7: It’s go time
Once you have your act together and decided on things like pay periods, you can actually start paying people. We hope some of that excitement you feel about your business is creeping back in.
It’s also a good time to share important details about the payroll process with employees. Like, when they can expect to be paid, how they’ll be paid (such as written check versus direct deposit), and any deductions they should know about. Add these details to your employee handbook.
Having EBC HR & Payroll Solutions, Inc. on your team allows you to move forward with confidence, knowing that we’re doing right by your employees, doing right by you, and it’s all being done in accordance with all the latest rules, regulations, and laws. Our philosophy is to provide a comprehensive, wide range of services to all our clients.
For more information regarding Tax/Banking and Payroll Services provided by EBC, please reach out to Mark Terry, Business Development Consultant at 716.998.4404 or firstname.lastname@example.org and/or Charles Bagley, Sr. Human Capital Management Business Consultant at 716.574.9947 or email@example.com.
Source: Gusto Blog