Setting up payroll in a small business

For a small business with new employees, the process of setting up a new payroll system can be daunting. By breaking down the process into small steps, the process can go smoothly, employees will get their paychecks on time, and tax filing deadlines will be met with ease.

Step 1: Obtain a federal identification number from the Internal Revenue Service and a state identification number from your state revenue department. Federal id numbers can be acquired instantly by applying online (see New employer ID numbers now available instantly online). Contact your state revenue department directly for information on applying to be a payroll provider in your state. While you're at it, get a copy of IRS Circular E, Publication 15-A and a similar payroll tax publication from your state.

Step 2: Have your employees fill out necessary enrollment forms. For federal taxes, the employees must fill out Form W-4. There is a similar form available from your state. Note that employees may revise these forms at any time.

Step 3. Determine a pay period. Employers are entitled to pay based on any schedule they desire, so choose a schedule that fits best with your company and your schedule of receiving revenue. Typically companies pay weekly, bi-weekly, semi-monthly, or monthly. The IRS and your state revenue department provide withholding tables and rates for all of these choices. Some states require employers to pay more frequently than monthly, so check your state regulations before making a decision to pay on a monthly basis.

Step 4: Determine company policy for sick and vacation days.

Step 5: Determine company policy for overtime and bonuses. Check with your state for rules on paying overtime.

Step 6: Decide upon benefits, such as health insurance and a retirement plan, which will be paid for through payroll withholding.

Step 7: Calculate withholding. If preparing payroll by hand, use the tables in IRS Circular E (see Step 1) and the printed tables you obtain from your state. If you are using a software program for processing payroll, the withholding calculation will be automatic.

Step 8: Make tax deposits. The amounts you withhold for taxes and benefits must be paid to the government and the benefits providers. Payments for federal taxes are deposited with your financial institution (however, some employers are required to make their deposits electronically – see the IRS Employment Taxes page for more information.

Step 9: Prepare and file payroll tax returns. The IRS requires that you file a quarterly Form 941 (you can file less frequently if your payroll is below a certain threshold), reconciling the amount of tax you owe and the amount you have paid. Similar forms must be filed with your state revenue department. File Form 940 annually to reconcile the federal unemployment tax. Check your state rules for unemployment tax, which might be due monthly or quarterly. Prepare annual W-2 forms each January for all of your employees, showing how much they were paid and summarizing their withholding for the previous year. These forms are filed with the Social Security Administration and copies are sent to your employees.

You may like these other stories...

IRS must take oath on Lerner emails: judgeMackenzie Weinger of Politico reported on Thursday that a federal judge ordered the IRS to explain under oath how it lost emails connected to Lois Lerner, the ex-IRS official at the...
Credit Suisse says pension assets at risk unless court delays sentencingJohn Letzing of the Wall Street Journal reported on Wednesday that Credit Suisse Group AG says its management of billions of dollars in assets for...
The prospect of International Financial Reporting Standards (IFRS) being fully adopted in the United States in the near future are growing less likely, as the Financial Accounting Standards Board (FASB) and the International...

Upcoming CPE Webinars

Jul 16
Hand off work to others with finesse and success. Kristen Rampe, CPA will share how to ensure delegated work is properly handled from start to finish in this content-rich one hour webinar.
Jul 17
This webcast will cover the preparation of the statement of cash flows and focus on accounting and disclosure policies for other important issues described below.
Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.