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How To Set Up Online Payroll For Your Small Business

If your small business is growing, your team may be growing too. If this applies to you, it may be time to set up online payroll. Setting up payroll for your business may seem stressful and maybe a little intimidating but it will most likely save you more time and money in the long run... Let's look at how to set up online payroll for your small business...

1. Get an EIN (Employee Identification Number)

Individuals are identified by their Social Security Number in the eyes of the government. For businesses, this is known as an employer identification number (EIN) or federal tax identification number. In order to file payroll taxes, your business will need one. It is free to obtain an EIN and can be done online or mail. 

2. Research state requirements

.Your state and locality may have additional requirements in addition to EINs. Some states, such as Texas, do not collect state income taxes. A business registration number is required in some states, such as New York. You can check the IRS website to check. 

You can also look up your state's requirements and apply for an ID number using the Small Business Administration's guide on state tax IDs.

3. Identify contractors and employees

Before you can set up payroll for a worker, you must determine whether they are an employee or a contractor.

A typical employee works full-time or part-time. A contractor is typically a self-employed consultant or freelancer. This determines how payroll is set up. Payroll and taxes will be handled differently for each, so it is important to classify them correctly. If you misclassify, the employer is liable for any back taxes, penalties, and interest. Not to mention, misclassifying a contractor as an employee may result in you paying payroll taxes when you should not.

4. Collect employee or contractor information

Now that you've determined your employees vs contractors, you'll need to collect their information in order to set up payroll and do taxes. You'll need to collect information such as:

  • Name

  • Address

  • Social Security Number

  • Contact Info

  • Deductions

  • Direct deposit information

Employees must complete a W-4 form, while contractors must complete a W-9 form. Employers deduct taxes from employees' paychecks. Independent contractors are responsible for paying their taxes quarterly through estimated tax payments, and their employer does not withhold any.

When a new employee starts, they usually fill out a W-4 form, but they may need to update it if their circumstances change, such as getting married or having a child. You should obtain these forms from your employees and contractors prior to their first day on the job.

5. Choose pay periods

When it comes to choosing a payroll schedule, you have 4 options:

  • Weekly

  • Bi-weekly

  • Semi-monthly

  • Monthly

Depending on the nature of your business, bi-weekly is usually the most common payroll schedule. Some states also have guidelines on when and how employees are paid so it's important to familiarize yourself with your states labor laws and guidelines to avoid any sort of penalties.

It's also important to keep in mind that the more frequently you run payroll, the more accounting and processing fees you will incur. Strive for a balance of cost-effectiveness and convenience while adhering to jurisdictional requirements.

6. Choose a payroll software

Now that you've gathered all of the necessary information, it's time to choose a payroll software that works best for your business. If you use an accounting software such as Quickbooks

Online, you can look into their payroll add on or you can use a stand-alone payroll software. When choosing a payroll software, keep these questions in mind:

  • Is it user friendly? Automated payroll is supposed to make your life easier, not harder. Make sure it's easy to set up and navigate. Ideally, it should integrate with your accounting software as well.

  • Is it too expensive? Keep in mind how much you're willing to spend and research your best options. It's important to keep in mind what all you want out of the software because you may not need all of the features some offer.

  • Does it stay compliant?  Payroll software should assist you in remaining compliant with regulations. Gusto (highly recommend), for example, provides compliance assistance for federal, state, and local taxes. It also offers direct deposit and automatic tax filing.

  • Does it offer reporting? Look for advanced reporting features to track your payroll data and make informed business budgeting decisions.

7. Create an employee handbook

While this isn't essential in setting up your online payroll, it's important to have your payroll policies in a handbook for your employees to refer to. After all, they should know how and when they will be paid.

You should also specify the exact payroll schedule as well as how payments are calculated and administered. You may use the following compensation methods:

  • Salary - a set rate or fixed payment received by an employee for performing job duties.

  • Hourly - an hourly rate determined by the number of hours worked by an employee.

  • Commission- a percentage of the revenue generated by sales and is commonly used in sales.

  • Tips - voluntary gratuities given by customers and are typically given to service industry workers.

  • Supplemental pay - includes any additional compensation, such as back pay, severance pay, bonuses, and accumulated sick leave.

If you know you're ready to hire but aren't sure where to start... or you have some help but are ready to scale and want to do it correctly check out the Outsourcing Toolkit, so you can focus on what you WANT to focus on!


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