If your business is starting to hire employees, here’s how to set up payroll for the first time.
Your small business has been around for a while, but you’ve just gotten around to hiring employees. Or maybe your company is brand new and equipped with employees right out the gate. Either way, it’s time to run your first payroll.
No matter the size of your payroll, it needs to be executed in a timely, accurate, and organized manner. If done haphazardly, errors, and compliance issues are likely to occur. Next is a checklist to help you carry out your first payroll in an orderly and compliant way.
Note: The checklist assumes that you’ve already taken the necessary legal steps to become an employer — such as obtaining an Employer Identification Number (EIN), and if applicable, state or local tax IDs and workers’ compensation insurance.
Choose a payroll system
You will need to decide which payroll system(s) you will use to administer and manage your payroll responsibilities.
Payroll system options:
- In house. You handle all of your payroll duties internally, without the help of an external service provider.
- Fully outsourced. You hand over all of your payroll responsibilities to an external service provider — who processes your payroll from start to finish plus takes care of post-processing duties, such as payroll tax administration.
- Co-sourcing. You outsource some of your payroll duties, such as administration of payroll taxes and wage garnishment, and perform the rest in house.
- Payroll software. The software calculates gross wages, payroll deductions, and net pay plus enables direct deposit. Modern payroll software offers online payroll management, which lets you manage payroll from anywhere plus pay and file your employment taxes online. Regardless of how many employees you have, it’s in your best interest to use payroll software — which is far more efficient and accurate than doing payroll manually.
Select a pay frequency
Whichever pay frequency you choose, it should not be less often than the state-required minimum payday. If your state does not mandate minimum paydays, you must still designate a pay frequency for your employees.It’s important to establish a pay frequency, which will dictate how often you pay your employees. According to the Bureau of Labor Statistics, most private businesses (36.5%) pay their employees biweekly. Weekly pay frequency comes in second at 32.4%. Semimonthly and monthly payrolls are the least common.
Whichever pay frequency you choose, it should not be less often than the state-required minimum payday. If your state does not mandate minimum paydays, you must still designate a pay frequency for your employees.
Also, don’t forget to establish pay period start and end dates. For example, the pay period for a weekly payroll may start on Sunday and end on Saturday.
Tips for determining your payroll responsibilities
- Consult Employer.gov for your employment obligations under federal law — such as federal minimum wage, overtime, child labor, employee benefits, and labor posters.
- Check with your state labor department for your employment obligations under state law, such as state minimum wage, overtime, child labor, paid time off, rest and meals periods, and unemployment insurance.
- Review IRS Publication 15, Employer’s Tax Guide to understand your federal employment tax obligations. This includes withholding federal income tax, Social Security tax, and Medicare tax from your employees’ wages plus paying your own share of federal employment taxes.
- Contact the state or local taxation agency for applicable state or local employment tax requirements.
Timekeeping system and payroll policy
Implement a timekeeping system that will support your payroll process, such as a time and labor platform that integrates with payroll software. This is highly advisable if you have nonexempt employees.
Also crucial is developing a payroll policy that covers essential procedures — such as hours worked, paid time off, breaks and lunch periods, overtime (if allowed), mandatory and voluntary payroll deductions, paydays, and final paychecks. Consider seeking legal advice when drafting your payroll policy.
Prior to running payroll
- Register with the Internal Revenue Service and applicable state and local taxation agencies. Make sure to set up electronic deposit and filing of your employment taxes.
- Make sure the individuals you are about to pay through your payroll system are truly employees. Do not pay Independent contractors through payroll.
- Ensure that your employees are properly classified as nonexempt or exempt. Look to the Fair Labor Standards Act (FLSA) and applicable state law.
- Verify that you have a completed and correct Form I-9. Do this for each employee.
- Provide your employees with the necessary federal, state, and local tax withholding forms to complete. This includes Form W-4.
- Give your employees a direct deposit form to fill out. This way, their pay will go straight into their bank accounts. The 2020 National Payroll Week survey shows that the vast majority of employees (93.87%) are paid via direct deposit.
- Implement “live check” procedures as a backup payment method. This is also for employees who do not have or want direct deposit. You can also offer payroll cards.
- Conduct new hire reporting with the designated state agency. New hire reporting enables child support agencies to more effectively collect child support from non-custodial parents who are working.
- Verify that your employees’ information is accurately entered into the payroll system. This includes their hourly rate or salary, company benefits, and mandatory and voluntary payroll deductions.
- Confirm any additional payments to be made (e.g., bonuses). Since this is your first payroll, you probably won’t have any payments beyond regular hourly wages or salaries. But if you do, be sure to factor them into your payroll calculations.
It’s imperative that you do not wait until the last minute to process your first payroll. Give yourself enough time, such as 4 to 5 business days prior to the payday. This way, you can correct any issues that arise during processing, before payday hits.
It’s imperative that you do not wait until the last minute to process your first payroll. Give yourself enough time, such as 4 to 5 business days prior to the payday.
During payroll processing
- Double-check the pay date and pay period dates for your first payroll.
- Calculate gross-to-net wages for each employee. Payroll software will perform this task, based on employees’ timekeeping data, gross wages or salary, and payroll deductions.
- Run reports to verify the accuracy of the payroll software calculations.
- Fix any errors that you find.
- Transmit the direct deposit file to the bank and confirm receipt.
- Print live paychecks for employees who do not have direct deposit.
- Generate pay stubs.
- Close out the payroll once you’re confident that it is correct.
After payroll processing
- Record your payroll transactions in your small-business general ledger.
- Distribute paychecks and pay stubs on payday.
- Retain payroll records, according to FLSA and state payroll recordkeeping laws.
- Remit employment taxes to the taxation agencies based on your designated schedules. Most employers must make either semi-weekly or monthly deposits to the IRS for certain federal employment taxes.
- File your employment tax reports with the taxation agencies by the mandated deadlines.
The specifics of your first payroll will depend on various factors, including your industry and payroll size. Once you know your exact payroll obligations, tailor your payroll management checklist to match those responsibilities. If you decide to go with an outsourcing payroll partner, be sure to coordinate closely with them during your first payroll, and as needed thereafter.
Check out our People Ops Podcast episode “3 Easy Ways to Foster Financial Wellness at Your Small Business.”