How To Set Up A Payroll System In A Small Business?

There is a certain procedure that you must follow in order to set up payroll system in a small business. You do not necessarily need to have a large company with hundreds of employees to think about having a payroll system. Whether the number of employees in your small business is one hundred or just one, there are several benefits of setting up a payroll system. For example, it can save you a lot of time, which you can use in more productive areas. It also streamlines everything and makes sure that you are fulfilling all your responsibilities as an employer. Besides that, it is also very important to note that every year many business owners are penalized by IRS for payroll errors. Therefore, having an efficient payroll system is crucial for the smooth operation of just any business – be it a small one or a big one. Following is a brief rundown on some of the basic steps that you need to follow.

Obtain EIN (Employer Identification Number)

In order to set up payroll system in a small business, the first thing you have to do is to obtain EIN from the IRS. You must obtain this number before you issue an appointment letter to any employee. The Employer Identification Number is sometimes also referred to as Form SS-4 or Employer Tax ID. You need this number when it comes to reporting certain documents or taxes to the IRS. Besides that, almost every state requires employers to report about their employees to a specific state agency; you again need the EIN to do that. You can contact the IRS office or visit their official website to file an application to obtain EIN.

Obtain Local/State Ids If Needed

Depending upon the state you are running your business in, you may be required to obtain a local or state ID also. Without this, you may not be able to set up payroll system in a small business. Therefore, the second step is to find out if the tax requirements in your state require you to obtain this ID also. If yes, follow the set procedure to obtain the same.

Understand The Difference Between An Employee And An Independent Contractor

There is a very thin line of difference between an employee and an independent contractor. Still, the difference is a remarkable one and it plays a crucial role when it comes to several business and tax related activities, such as paying unemployment taxes, paying or withholding Medicare and Social Security taxes, or withholding income taxes.

Complete The Paperwork Related To Employees Thoroughly

Make sure that all your new employees have properly filled out the Federal Income Tax Withholding Form W-4. It is a crucial step to set up payroll system in a small business. It is only after these forms are completed and returned to you when you will be able to withhold an accurate amount of federal income taxes from their salary.

Does Your State Laws Say Anything Specifically About The Pay Period?

Though in most cases, it is entirely up to you to decide about the pay period, still there are a few states that have specific laws regarding this. Therefore, you are strongly recommended to look into your state law code to confirm that the pay period you have introduced or are planning to introduce is in conformation with the laws.

Document The Terms And Conditions Regarding Your Employee Compensations

It is very important for you to keep in mind that verbal agreements have no legal value. Therefore, you must document all the terms and conditions about the employees compensation policy. This way, when you set up payroll system in a small business, you will be able to monitor various business variables, such as how you pay overtime, how you track employee hours, and how you handle paid time off. Though it may not be a legal requirement, it plays a crucial role to streamline your business operations, especially when it comes to handling financial issues with employees. You must have a thorough knowledge about the federal and state labor laws while you are trying to prepare the terms and conditions regarding employees compensation.

Choose The Right Payroll System

You are recommended to do some serious research on which type of payroll system can make the right choice for your small business. In general, the options include outsourced programs or an in-house system. If it is an in-house system, you will need a good commercial accounting software program. Some popular options that small businesses always use to manage tax collections, direct deposits, check processing, and other such things include ADP, PayChex Online Payroll, Intuit Online Payroll, and Sage Peachtree. You can decide about the right option based on your specific requirements. Alternatively, you can also choose to outsource the payroll service to an accountant (or a firm).

The above information is just a general overview to get you a good idea about how to set up payroll system in a small business. You may need to consult with a qualified and experienced business lawyer for legal help in this regard.