How to setup payroll for your small business

What steps do you need to take to set up payroll

If you’ve already decided on a payroll system for your small business, conducting payroll is easy. You just need to gather information from your employees and decide how often you want to pay them. Check out the step-by-step instructions for setting up payroll.

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1. Obtain employee identification number (EIN)

The employee identification number is essential for tax reporting and allows you to hire employees legally. Businesses generally need an EIN to operate. To obtain an EIN, you must apply for it with the IRS. If the applicant is a US citizen, has a social security number (SSN), and hasn’t received another EIN in the same day, they will likely be eligible to receive an EIN for their business entity.

2. Gather employee tax information

Gather employee tax information so you can complete payroll. You need your employee’s name, address, phone number, social security number, date of birth, and marital status. A W-4 form incorporates all this information. That way you, as an employer, know how much federal income tax to withhold from your employee’s paychecks. Appropriately withholding money is critical for tax returns, so your employees only pay what they owe.

3. Decide on a pay period

Decide when you will pay your employees. Pay periods are an interval of time an employee is paid a salary of wage. It is used by employers to calculate hours worked, earnings and deductions. Pay periods can be weekly, bi-weekly, semi-monthly, or monthly. The most common type of pay period in the United States is bi-weekly. Factors like cash flow, employee preference, payroll process, and legal requirements are important to keep in mind when choosing a pay period.

4. Choose a reliable payroll system

An automated payroll system eliminates the leg work in calculating gross pay and payroll taxes. It reduces errors and helps you save time conducting payroll.

5. Calculate gross pay

If you aren’t automating the process with a payroll system, you need to calculate the gross pay for each of your employees. For hourly workers, you need to multiply the number of hours worked by their standard hourly wage. For example, if an employee works forty hours in a week and earns $25 per hour, their gross pay would be (40 hours x $25) = $1000. For salaried workers, you divide their salary by the number of pay periods in a year. If an employee earns $60,000 and they’re paid monthly, they will earn $5,000.

6. Calculate payroll taxes

In addition to calculating gross pay, you will need to calculate how much to deduct from your employee wages in taxes. Again, if you use an automated payroll system, payroll taxes will also be deducted automatically. Payroll taxes include federal income tax, social security and Medicare tax, and federal and state unemployment tax. Learn how to manage payroll taxes to avoid penalties.

Payroll is a simple process if you take advantage of payroll service systems available. Otherwise, you’ll have to do a bit of legwork to calculate gross pay and payroll income tax to withhold from your employee’s paychecks. Appropriately withholding money is critical for taxes. For more help learning how to manage your small business and maintain its financial health, learn more budgeting tips.