The idea behind this topic is to assist those who are setting up a payroll system from scratch. This topic may also be helpful for those who are in the early stages of managing payroll and wish to get on the right track.
Any small business owner can tell you that paying employees involves a lot more than writing a check every week or two. There are a number of laws governing employee compensation and they change all of the time. If you don’t want to have trouble with any of the various government agencies, you have to be well organized and stay up to date on federal and state guidelines.
The key to staying on top of things is setting up a good system that complies with all the applicable state and federal laws. To get started, try this step-by-step approach to setting up a simple payroll system:
Step by Step
Get an Employer Identification Number (EIN). You can apply for a number by filling out IRS Form SS-4.
Get state and local identification numbers if they are required in the area or areas where your business operates.
Separate your independent contractors and full-time employees. You don’t have to withhold taxes from an independent contractor’s pay. Don’t think that you can save time by classifying all of your employees as independent contractors. The IRS may penalize your business heavily if you designate regular workers as independent contractors. For details, see the IRS Publication 15 Circular E, The Employer’s Tax Guide.
Have each employee fill out and sign IRS Form W-4. The form provides two critical pieces of information: the employee’s Social Security Number and the allowances the employee is claiming for income tax withholding purposes.
New workers should fill out a W-4 as soon as possible. Employees who marry or divorce, have children, gain or lose a dependent or want to change withholding amounts for any other reasons should also complete and sign a new W-4.
If you do not have an employee’s W-4 on file, you are required by law to treat the employee as a single person with no exemptions for withholding purposes.
Have all of your employees complete aI-9 form. This is a federal requirement. You must have these on file for all employees.
Establish a pay period. Most states require that employers pay workers on regular paydays. A few states allow some employees to be paid once a month, but most require that you pay your employees at least twice a month. Check with your state department of labor for your state’s specific guidelines.
For most of you, this will likely be Monday through Friday. Payroll will start Monday morning and end at midnight Sunday. Many companies either issue payroll checks the following Monday or Friday.
Establish payroll records. For federal tax purposes, you must keep the following information on file:
The name, address and social security number of each employee
Obtain copies of social security cards.
Obtain copies of driver’s licenses.
The total amount and date of each paycheck
The portion of each payment that constituted taxable wages
Obtain copies of each employee’s W-4
Dates and amounts of tax deposits
Copies of returns you filed
Copies of any undeliverable W-2 forms
Decide if you will pay workers for time spent in orientation, sick days, meals or working from home. Your state department of labor can tell you if you are required to pay for this time.
Decide what benefits your company will provide such as vacation, paid personal time, paid leave, etc.
Check your local overtime rules. According to most state laws, any work that exceeds 40 hours per week must be compensated with at least one and a half times the employee’s hourly wage.
Figure out what you need to withhold. The IRS expects you to withhold a portion of every employee’s paycheck. Chances are your state and even local governments require withholding as well. The government provides tax tables that calculate the amount you must withhold once you have established the appropriate amount of taxable wages. At the time this was written, all states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming impose a personal income tax. Like the federal government, most states provide tables to help you compute withholding amounts.
Many business owners save time and reduce the risk of errors by hiring a bookkeeper or payroll service. An outside payroll person or service can perform basic payroll-related tasks, deposit tax payments, prepare W-2s and take care of insurance and retirement plans.
Setup your payroll in Total Office Manager. Use the following instructions along with Total Office Manager’s built-in help system. Remember, you can open any form and press the F1 key for help on that specific form.