How to Set up Payroll for your Small Business

Andrew DePascale

Congratulations on opening your new small business! A lengthy and often daunting list of to do’s await as you get your business up and running. From insurance policies to web design, where do you begin?

Today we will highlight one of the most important parts of your new business, which is hiring employees and setting up payroll.

How will you pay your employees? Will you set up payroll yourself and manage it in-house? Or will your payroll be outsourced to a trusted third party payroll service?

Small business owners are expected to be great generalists. Having a foundational understanding of all the functions of the business, yet relying on many vendor relationships for the nitty gritty.

When it comes to payroll, becoming an expert can take years, and it is unnecessary for a small business owner. It is however recommended to have a general understanding of your responsibilities as an employer, and how payroll works.

In-House or Outsource Payroll?

The first decision that needs to be made is whether your payroll will be managed internally or outsourced. This depends largely on the acumen and prior payroll experience of the business owner. If you’re a first time business owner, you’ll have plenty of responsibilities ahead in building your business and attracting new customers.

Doing payroll in-house can quickly become a headache and distraction.

Outsourcing payroll frees up valuable time to focus on the core duties of your business, and also delegates state and federal tax responsibilities to a third party. Many payroll providers today also offer HR and employee training support, which are invaluable for an employer.

Vetting the Payroll Company

If you do decide to outsource, you want to make sure you choose the right payroll provider for your specific needs, and investigate the stability and security of the company. Payroll providers are not all that dissimilar from a bank. They are moving large amounts of money in and out of your business, and remitting payments to different agencies and employees.

You want to make sure the company is reputable and trustworthy. Asking about the financial controls, data security and insurances they carry should be weighted much more heavily than the “lowest price.” There have been many cases in the U.S. of payroll fraud or negligence, and you want to avoid this at all costs. An additional important question to ask is if the payroll company has a “BCP” (Business Continuity Plan.) When an unexpected event like a pandemic or a natural disaster occurs, does the payroll company still have the ability to back up customer data and distribute funds?

Cross State Employees

When an employee lives in another state other than where your small business is located, you’ll want to make sure to collect and remit the proper payroll taxes to that state. Each state has their own payroll tax requirements to be withheld.  Examples: income, unemployment, and local taxes.

The correct payroll tax setup will alleviate headaches in the future for both the employer and employees. We offer free resources for each state via our Small Business Center.

Employee Compensation and Classification

As a new business owner, you want to make sure you are paying your employees correctly. This includes how frequently, how much, and maintaining compliance within the Fair Labor Standards Act (FLSA.)

To keep this top level, you should decide if you will pay your employees hourly, salary, gratuity, or per-diem etc. If you are unsure you can review benchmarking compensation charts in your industry.

You should also review under FLSA guidelines to understand if an employee is exempt or non-exempt in determining if the employee must receive overtime pay.

*It is recommended to review the particular overtime rules in your state and other mandated wage laws. Example: Paid sick leave.

An extremely important issue currently facing employers is employee misclassification.  Federal and state labor agencies are cracking down on misclassified employees and issuing costly penalties. It is critical to classify employees correctly as W2 wage earners (payroll taxes withheld), or a 1099 independent contractor.

*The IRS provides general guidelines on making this determination correctly.

Hiring Documents and Personnel Files

As an employer, getting in the habit early of keeping accurate employee records is good practice.

A basic personnel file for a W2 employee should contain a current form W4 in the current year the employee was hired, as well as a current USCIS form I-9 to verify the employee is eligible to work in the U.S.

Other recommended items include a photo ID and a mutually signed copy of an employee handbook with job descriptions.

If you found this helpful, we can further streamline the entire payroll process for your business.

Click here for more information on how accelerates small business payroll.