Setting Up Payroll for a Small Business

Setting Up Payroll for a Small Business

Payroll funding is a necessary chore for any small company, whether it has one employee or 20. The prospect of handling the payroll function may seem so daunting that your first thought is to outsource it to someone else. However, with a little planning, you can do it much less expensively in-house, especially if you have only a few employees. Here are 8 steps for setting up a small business payroll system.

Get the Federal, state and local identification numbers that you need. If you have employees, you will need a Federal employer identification number and, depending on your state and locality, you may need state and local IDs as well.

Decide on your small business’s compensation policies. These include a compensation payment schedule (usually weekly, bi-weekly or monthly) and policies for sick pay, vacation pay, overtime and so on.

Have all employees fill out W-4 forms so that you can withhold the correct amount of federal taxes from their paychecks.

Get a good payroll processing program. This is crucial, because once you’ve input the necessary date on each employee, this software will automatically calculate taxes, allow you to print paychecks, provide a detailed record of all payroll activities, and keep track of what tax payments are due and when. Your accountant or other small business owners may be able to recommend business software with a good payroll function. You can, of course, do payroll manually, but that will be more time-consuming and risk of errors will be higher.


Be sure that there are no local payroll taxes that aren’t included in your software program. Where I live, there is a local tax that must be paid by each employee to support community emergency services. Since it is not in my payroll system, this tax has to be calculated and withheld separately.

Use electronic filing systems as much as possible. Most are easy to use and, based on my experience, once you are registered on these systems, they can save you an enormous amount of time. A growing number of tax forms must be filed electronically, so, whether you like it or not, electronic filing is probably in your future.

Know what tax forms must be filed and when. Also, understand the difference between taxes withheld and paid during each quarter and tax returns that must be filed quarterly. Your accountant should be able to educate you on when taxes are due and what filings have to be made monthly, quarterly and annually. Be sure to get all tax forms in on time to avoid penalties.

Get organized and make rigorous recordkeeping a priority. The better organized you are, the easier it will be to do your payroll quickly, efficiently and accurately. Also, know what records must be kept and for how long.

You may decide that, because you don’t have the time or inclination to do your small business’s payroll in-house, you will outsource it to an accountant or payroll specialist. Even so, you need to know the basics of the payroll function so that you can provide your payroll processor timely and accurate information. Therefore, it is a good idea to have a working knowledge of payroll and payroll taxes even if you never cut a payroll check yourself.