How to Do Small Business Payroll

A step-by-step payroll setup guide

Establishing payroll for a small business is one of the most vital administrative tasks an owner can complete. Done wrong, payroll can lead to workers who aren’t paid when they should be, taxes that are not remitted promptly and your company being out of compliance with local or national regulations. This easy to follow guide takes you through the steps needed, from planning your first payslip all the way to maintaining payslips so you can run payroll with confidence!

Plan your payroll structure

Start by deciding how you’ll categorize your workers, and how frequently you will have to pay them. Determine who is full-time, part-time or a contractor. Each has its own tax and reporting rules. Decide on a pay frequency that straddles cash flow considerations and administrative logistics: weekly, biweekly, semimonthly or monthly. Clearly state your pay periods and the dates payments will be made, so employees know when they will receive their salaries.

Collect essential employer information

Before you can process payroll, please have all required business identifiers available. Get an employer identification number and withhold taxes if applicable. You will also have to add state and local payroll taxes if they apply. Make sure you have a separate business account to handle payroll deposits and tax payments apart from other money.

Ask for employee details and tax forms

Have each employee fill out the appropriate tax withholding paperwork, as well as give you his full name -- including middle initial or name -- along with home address and social security number or (if he has one) tax ID number. For contractors, get this completed contractor information form. You should report the employee’s pay rate, pay schedule and any authorized deductions. Keep copies of these forms in a separate, locked personnel file.

Determine compensation and deductions

Add up hourly and/or salaried gross wages for each pay period. Account for overtime where applicable. Find mandatory deductions, like income tax withholdings and employer payroll taxes, as well as voluntary ones, including retirement contributions, health benefits, or wage garnishments. Be aware of pre-tax deductions and after tax to properly calculate taxable wages.

Sign up for Payroll taxes and unemployment insurance

Signup with applicable tax agencies to submit employer withholding taxes. These are usually social taxes plus unemployment insurance, employer-like taxes. Familiarize yourself with your jurisdiction’s deposit schedule and e-filing requirements, keep good records of tax account numbers and due dates to avoid penalties.

Create payroll records and a record of the hours worked

Develop and maintain a payroll ledger or electronic file that includes the hours worked by employee per work week for each pay period, straight-time earnings, overtime earnings (if applicable), deductions from wages, net wages paid to such employee(s) and any employer payment for taxes owed. Keep copies of pay stubs & payroll reports. Good record keeping made audits, reconciliations and year end reporting easy. Develop a process for maintaining check stubs, direct deposit confirmations and tax filings.

Select an option for running payroll

Choose whether you will do your payroll in-house or contract it out. If it’s a matter of handling payroll in-house, assign someone you trust to handle the calculations and tax filings, or distribute the work among several capable employees. If you process payroll by hand, create detailed checklists and reviewing procedures that can help reduce any errors. Manual or automated (whichever best suits you), be certain that bank transfers, paychecks and tax deposits are timely.

Calculate and process payroll

For each pay period, compute gross pay, then Deduct employee withholdings and pre-tax deductions and Add any employer contributions or reimbursement. Reconcile payroll totals and pay employees either by issuing checks or using direct deposit. Submit pay stubs that include the gross pay, deductions, taxes withheld and net pay, as well as year-to-date totals. Reconcile payroll to your business bank account after every pay run.

Pay taxes and submit necessary reports

After you run payroll, pay withheld employee taxes and employer tax responsibilities to local authorities. Adhere to deposit deadlines and electronic payment instructions. Electronically file payroll tax returns and reports, and also do any quarterly or year end required filings. Maintain evidence of all tax payments and filings as proof of compliance.

Manage benefits, workers comp., and year-end responsibilities

Additionally, determine retirement and health-coverage deductions and employer contributions. Verify workers compensation is up-to-date and premiums are calculated accurately. Prepare and disseminate year-end statements to employees and contractors, and submit yr end reports to the Tax department. Then verify pay record accuracy and make any adjustments necessary, then close the year.

Continuous compliance and review processes

Payroll laws fluctuate, so monitor changes to tax rates, wage laws and reporting requirments. Compile regular payroll audits and identify irregularities, and make necessary adjustments for errors and updates employee data. Educate your payroll personnel on best practices and develop a back-up plan for processing should your key payroll processor become unavailable.

Real world advice for better payroll solutions

• Don’t mingle payroll with general funds: An isolated account minimizes errors and makes reconciling easier.
• Automated repetitive calculations: Even basic spreadsheets with cells locked with formulas reduce arithmetic errors.
• Adopt a second-authentication process: Before you write a check, have someone else review the total and tax liaibilities.
• Document policies: written schedules for paydays, and for how you will handle overtime, plus which deductions will be made are safeguarding both the business and employees.
• Be clear in communication: employees should know when they will have questions about pay answered and what documentation is necessary if changes are made.

Conclusion

Small business payroll setup involves careful planning, accurate recordkeeping and consistent steps along the way. If you stick to these steps, you’ll have built a stable payroll operation that ensures employees are being paid and all taxes and regulations are up-to-date. Begin by compiling the appropriate data, setting pay policies and putting in place procedures for calculation, payment and reporting. Well-defined processes make payroll a repeatable undertaking that reinforces business predictability and employee contentment.