Payroll for Startups & Small Businesses

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One of the most important responsibilities of running a business is making sure your employees get paid. Unfortunately, when it comes to payroll, there are a lot of legal policies and processes you must follow. But don't worry, we'll break it down for you and help you decide whether you should be handling the payroll process or handing it off.

Doing Payroll Yourself

You have two options when it comes to paying your employees: handle the payroll process yourself or rely on a payroll provider to take care of it for you. This is a very important decision to make. Susan Post, East Divisional Director for the Society of Human Resource Management, recommends leaving it to the professionals:

One thing I learned early in my HR career is don't mess with employees' paychecks," explains Susan. "Unless you have an employee on staff who is well-versed in employee payroll systems and related regulations, consider outsourcing to a vendor who specializes in this.

According SurePayroll, 40% of small business owners get fined every year for filing or paying their payroll taxes incorrectly – often amounting to $845 in IRS fines annually per small business. So, if you have the budget to hand off payroll processing to a vendor, we recommend you do.

Payroll Basics

Don’t worry. If a payroll service provider doesn't fit into your budget and you're forced into handling it yourself, it’s doable. Just expect to spend a few hours each pay period calculating and processing employee payroll.

In addition to selecting the best software (which we talk about later), here are a few guidelines to follow:

Documents to collect

Each employee must fill out a Federal W-4. This tells you how much federal income tax to withhold from their paycheck. Be sure to also check to see if your state requires a State W-4 form as well.

For more on tax obligations, skip to Lesson 4.

Legal items to file

As an employer, it's your responsibility to get an employment identification number (EIN) from the IRS for each employee on staff. You’ll need an EIN for reporting taxes.

Laws to be aware of

It is very important that you stay current on state and federal laws. And not just the laws pertaining to the state your office is located in, but the state laws all your employees reside in; that means remote employees, too.

Schedule

You’ll have to decide on a payroll schedule to stick to; are you going to pay employees every week, bi-weekly, or on specific date? A set schedule will help you calculate your employee's wages correctly and help you withhold the correct amount of taxes.

Time tracking

Once you have a set payroll schedule, you also have to think about how you're going to track your employees' time in and out. It's important to set up an official system so you ensure that employees aren't over reporting their hours.

Fortunately, most time and attendance systems work with payroll software, making the process seamless.

Employee classification

Contractors and full-time employees are seen differently in the eyes of the IRS. As a result, it's very important to classify employees correctly because it influences how you withhold income taxes, and pay social security and Medicare taxes.

Payment method

Last but not least, decide how you're going to pay employees – whether it'll be direct deposit or paper check.

When comparing providers, Susan recommends the following:

Be sure to request multiple references from similarly sized companies currently utilizing this vendor. In my experience, the salespeople can over-promise and the technical folks under-deliver, so checking several references of current clients is highly recommended.