8 Important Steps to Set up Your Small Business Payroll Solution

8 Important Steps to Set up Your Small Business Payroll Solution

It doesn’t matter how many employees you have. It’s essential to set up a payroll system that streamlines your ability to stay on top of your responsibility as an employer. In addition, it saves time and helps protect you from incurring expensive IRS penalties.  Once your team has completed the necessary payroll courses online, it’s time to take a look at these eight steps that will help you set up a payroll solution for your small business.

Setting Up Your Payroll Solution

Obtain an EIN

Prior to hiring new employees, you need an employment identification number from the Internal Revenue Services. This EIN is typically called an Employer Tax ID.  This number is essential for you to report taxes and other important documents to the IRS and when reporting information about employees to state agencies. Contact the IRS directly or apply for an EIN online.

Figure Out If You Have To Have State Or Local IDs

There are lots of things employers need to know from new overtime rules to whether or not you need state or local IDs. Every state is different, so check with your state and local governments to see if ID numbers are required to process taxes where you live.

Know The Difference Between Independent Contractor and Employee

Make sure you understand the difference between an employee and an independent contractor. Legally, the differentiation between them isn’t always easy to decipher. It’s essential to know though because it affect how an employer withholds income taxes and withholds and pays Social Security and Medicare taxes.

Complete Employee Paperwork

All new employees are required to complete the Federal Income Tax Withholding Form commonly referred to as a W-4. The employee has to complete and return the form so employers know the correct federal income tax to withhold from his or her pay.

Select a Pay Period

Even if you have a manual process in place for this, it’s required to set up a monthly or bi-monthly pay period in most states. Many states favor bi-monthly payments. In addition, the IRS mandates that employers withhold income tax for that period of time even if the employee didn’t work the complete period.

Choose a Payroll System For Your Small Business

Payroll administration necessitates a heightened focus on accuracy — so take the time to do research and make sure you familiarize yourself with the many options that are available.  Consider asking other business owners the methods they use and encourage them to share tips for the set up and administering of payroll. You have options for managing payroll in-house or you can outsource it. For some businesses, outsourcing could be the best answer, but other businesses may prefer to keep it in house. No matter which option you go with, remember that the employer is responsible for the reporting and payment of all payroll taxes.

Begin Running Payroll

After you have the forms and needed information collated, it’s okay to begin the process of running payroll. Based on the payroll system you selected, you can enter it yourself or give the information to your accountant.

Report Payroll Taxes

Employers are required to provide various payroll tax reports to the appropriate authorities throughout the year. If you aren’t sure about what you are required to do, the IRS’s Employers Tax Guide can provide clear guidance on federal tax filing requirements. In addition, your state agency can fill you in on specific tax filing requirements.

The payroll process doesn’t have to be a headache, but it does require some work and a lot of acute attention to details. Make sure you contact the IRS with questions you have and become savvy at keeping records to help your small business payroll system run efficiently with less hiccups.

What are some steps you took to help set up a payroll system for your small business?

Payroll Folder Photo via Shutterstock

Megan Totka Megan Totka is the Chief Editor for Chamber of Commerce. Chamber specializes in helping SMB's grow their business on the Web while facilitating the connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide. Megan specializes in reporting the latest business news, helpful tips and reliable resources and provides advice through her column on the Chamber blog.