How to Set Up Payroll for Small Business: A Comprehensive Guide

We may earn a commission from the links in this post.

If you’re a small business owner who just hired their first employee, it's time to set up a proper payroll system. Calculating wages, taxes, and other payroll-related costs can take up a considerable amount of your time and energy, leaving you with less time to focus on running your business. However, it’s essential to get it right to ensure that your employees are paid correctly and on time. In this guide, we’ll walk you through setting up payroll for your small business.

Fundid Podcast

1. Determine Your Payroll Schedule

Firstly, you’ll need to decide how often you want to pay your employees. Common payroll schedules are bi-weekly, semi-monthly, or monthly. It’s important to choose a payroll schedule that works for both you and your employees. Once you’ve determined your schedule, make sure to communicate it with your employees so that they know when to expect their pay.

It may be worth consulting with a professional to clarify if there are any state-specific rules you need to follow concerning payroll schedules. These regulations stipulate how frequently an employer must pay their employees. For example, some states require weekly or bi-weekly payments, while others might allow monthly payrolls. Therefore, when determining your payroll schedule, it's essential that you familiarize yourself with and comply with your state's payroll laws. Ensure that your chosen payroll schedule adheres to your state's regulations to avoid potential legal complications.

2. Make Sure Your Employees Are Properly Classified

It is important to make sure that your employees are properly classified as either exempt or non-exempt under the Fair Labor Standards Act (FLSA). The distinction between exempt and non-exempt employees primarily revolves around wage laws, specifically overtime pay.

Exempt employees are not eligible for overtime pay, regardless of the number of hours they work beyond the standard 40-hour workweek. These employees often hold positions that require advanced knowledge or special skills to perform their primary duties. They must be paid on a salary basis, typically receive a higher level of pay, and have more flexibility in their schedules compared to non-exempt employees.

Non-exempt employees, on the other hand, are entitled to overtime pay at a rate of one and a half times their regular pay rate for any hours worked over 40 in a workweek under the FLSA. They can be salaried or paid hourly.

It's important to note that an employee's exemption status is not determined by whether they are paid a salary or hourly wage but by the nature of their job duties and responsibilities.

3. Obtain an Employer Identification Number (EIN)

An EIN is a unique nine-digit number that identifies your business for tax purposes. You can obtain an EIN from the IRS website or by filling out Form SS-4. Make sure to have your EIN before you start processing payroll for your small business.

How to Obtain an EIN

Obtaining an Employer Identification Number (EIN) is a straightforward process. Follow these steps:

  1. Visit the IRS website: Go to the IRS's EIN page here.
  2. Click on "Apply Online Now": You'll find this option at the bottom of the webpage.
  3. Read the application guidelines: Before you start the application, make sure you understand the system's requirements and limitations.
  4. Start the application: Click on "Begin Application" to start.
  5. Respond to questions: You'll be asked a series of questions about your business, such as what type of legal structure it has (sole proprietorship, corporation, etc.) and details about the owners.
  6. Review and submit your application: After you've responded to all the questions, review your answers before submitting your application.
  7. Receive your EIN: If your application is successful, you'll receive your EIN immediately. Make sure to save and print this document—you'll need it for tax and business purposes.

Remember, applying for an EIN is free, and you should only apply via the official IRS website. Be cautious of any third-party websites that ask for payment to obtain an EIN.

the friday fund

4. Calculate Payroll Taxes

Once you’ve determined your payroll schedule, the next step is to calculate how much to withhold from each employee's pay for taxes. You can use a payroll calculator to determine how much should be withheld based on each employee’s salary and other factors. However, many Payroll Systems, like Gusto, do this step for you automatically. Make sure that all of the calculations are accurate and up to date with the latest tax laws.

5. Choose a Payroll System

The last step is to choose a payroll system that you can use to manage your payroll processes. There are many different types of systems available, from full-service solutions to DIY options. Consider factors such as cost, ease of use, and features when selecting a system that best fits your needs. Some business owners prefer to use payroll software such as QuickBooks or Gusto, while others prefer to outsource payroll to a third-party provider. It’s important to choose a payroll system that meets the needs of your business and ensures compliance with federal and state laws.

Using Gusto for Simplified Payroll Management

Gusto is a popular payroll service that simplifies the payroll process, making it an excellent choice for small businesses. With Gusto, you can automate the payroll process, ensuring that your employees receive their pay on time, every time. The software calculates and withholds taxes automatically, saving you from the complex task of tax calculation. Moreover, Gusto offers an easy-to-use interface where you can manage all payroll-related tasks in one place. It even handles tasks such as year-end tax forms and new hire reports, freeing you from additional administrative work. Furthermore, Gusto integrates seamlessly with various accounting software, making it easier to keep your books up-to-date. This automation, accuracy, and integration offered by Gusto streamline payroll management, allowing you to focus more on growing your business.

Fundid's Related Reading: The Best Payroll Software for Small Businesses

Tips to Remember Once You've Started Payroll

  • Set Up Employee Records:
    You’ll need to maintain accurate employee records to process payroll for your small business. These records may include employees’ names, addresses, social security numbers, pay rates, tax withholdings, and benefits information. Make sure to keep these records updated regularly to ensure you’re complying with federal and state laws.
  • File Tax Forms:
    Each quarter, you’ll need to file Form 941 and submit your payroll tax payments to the IRS. Additionally, you may also be required to file other federal and state forms depending on your business and the number of employees you have. Make sure to stay informed about all applicable filing deadlines and requirements for your small business.
  • Pay Employees on Time:
    Lastly, don’t forget to pay your employees on time each payroll period. This is an important step to ensure compliance with federal and state laws and build trust with your employees. Make sure you have the necessary funds in your bank account before the payment date so that your employees receive their wages without delay.

By following the steps outlined above, you can ensure that your small business complies with federal and state laws while providing accurate and timely payments to your employees. For more information about setting up payroll for your small business, contact an experienced accountant or financial advisor who can help guide you. Taking time to set up a proper payroll system is a crucial step for any small business owner.

Let Gusto Handle Your Small Business's Payroll

Having a streamlined payroll system will help save you time and money so that you can focus on running your business. For additional peace of mind, consider investing in a comprehensive payroll service that handles all payroll-related tasks, such as calculating taxes, filing tax forms, and issuing payments. Sign up for Gusto today to help ensure that your business complies with applicable laws while freeing up more time to focus on other aspects of running your small business.

New call-to-action