As a new business owner, you’d be forgiven for using any spare time to catch up on what’s most important — be that hiring your first employee, creating a marketing strategy, or finally sitting down to eat lunch (it’s the little things, right?).
But if you’re planning to hire employees, setting up payroll is something that should rise to the top of your list. There are a few steps every business needs to take to make sure they’re ready to pay employees, get aligned with the tax man, and stay compliant with state and federal employment laws.
Don’t worry, it’s a fairly painless process! Here are the simple steps for making sure your payroll is set up right (so you can keep calm and business on).
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The 6 steps for setting up payroll
Register with the IRS for a FEIN
When it comes to payroll, surrender to the almighty acronym. FEIN stands for Federal Employer Identification Number, and is assigned to your business entity after registering with the IRS.
Why is this nine-digit number important? It’s a required field for any federal tax remittance, filings, and for your employees to pay their personal taxes.
To register for a FEIN, click here to visit the IRS site.
Now, register with any applicable state agencies
Surprise! The registration party doesn’t stop at the federal level. Depending on where your business is located and where your employees live, you’ll need to register with local state agencies so you can make payments and file taxes to the state.
If your employees live and work in the same state, you only need to register with the department or departments in that state.
Generally, there are two types of taxes your state will be concerned with: taxes you’ll be withholding from employees (state income tax, SDI, etc.) and taxes employers are asked to pay (state unemployment). These taxes may be collected by one agency or two separate ones.
For more information on which agency or agencies you need to register with and what’s required, check out OnPay’s handy state-by-state map. This step usually takes just a few minutes online.
Each agency will assign your business a unique account number. Similar to your FEIN, you’ll need this number when you pay and file state taxes. Additionally, you’ll be assigned a SUI rate if your business qualifies for state unemployment taxes. SUI stands for “state unemployment insurance,” which employers are responsible for paying for each employee.
Make sure to register in every state where employees reside
As a general rule of thumb, state income tax the employee owes is based on the state where an employee resides. The state unemployment tax is based on the state where your employee works.
There are exceptions to the above and “fun” state reciprocity agreements (here’s looking at you, New Jersey and New York) that can cause payroll confusion. When in doubt, contact the state agencies directly with questions and a confirmation of who you need to register with.
Do you employ anyone who works from home? This means their work site and residence are in the same state, and you’ll need to register in that state, too. Note that this rule only applies for employees — not contractors. If you have questions, here’s how to tell them apart.
Get employees’ paperwork in order
If you build it (a business), they (employees) will come. Once you’ve found the candidate of your dreams, make sure to celebrate. Hiring your first employee is a huge step. Not only is your business moving forward, but you’re helping someone earn a living.
So pat yourself on the back!
Now back to work. To properly set up payroll for each employee (and stay compliant with state and federal labor laws, you’re going to need to have your new employees fill out some paperwork:
To know what to calculate for the federal income tax (FIT) withholding, you’ll need the employee to complete and sign a W-4 Withholding Allowance Certificate.
Typically, if your state has state income tax (SIT), your employee will need to complete a state-specific withholding certificate as well. See your state’s requirements.
Submit a new hire report to your state’s new hire reporting center. This should be done within a few days of your new hire’s employment — each state has different deadlines for this submission.
Pro tip: It’s not always required, but it’s a really good idea to keep everyone on the same page by entering into a written employment agreement with your employees.
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Establish a pay schedule
Payday is often celebrated, but what day will it be for your employees? Will you have one pay schedule for everyone, or multiple ones for different types of employees (like salaried vs. hourly)?
Keep in mind that each state has requirements on how often employees must be paid. The most common pay schedules are as follows:
Weekly: Employees are paid the same day each week and there are typically 52 paydays a year.
Bi-Weekly: One of the more popular schedules, employees are paid the same day every other week (like every other Friday). This approach results in 26 paydays per year.
Semi-Monthly: With this schedule, employees are paid on the same two days every month, netting them 24 pay days a year. Common pay dates would be the 1st and 15th or the 5th and 20th of each month.
Monthly: Typically reserved for higher earners or salaried employees who don’t necessarily need more frequent checks, monthly is paid on the same date each month. With 12 months in a year, your monthly employee would take home 12 checks.
Got questions or want to know the pros and cons? Check out our guide to choosing a pay schedule.
Figure out how to pay employees
Don’t wait until that first payday to decide how your employees will receive their hard-earned money. As an employer, you have flexibility in how you set up employee payments, but these are the most common options:
Check: A tried and true old school method for processing payroll, you can hand write paychecks or use a payroll service provider to self-print or order printed checks. Consider, however, the potential for an employee to lose their check, delays in the employee depositing the check, and the time spent on preparing the checks themselves.
Direct Deposit: One of the more popular methods (if not the most popular way to pay), direct deposit offers many benefits. Employees can skip the hassle of depositing a check, they can be paid remotely, and you save time in the process. If you use a payroll provider, ask them how direct deposit can you save time and money.
Paycards: For employees who don’t have bank accounts, prepaid debit cards provide a convenient alternative to direct deposit. Employees can use the cards immediately and employers can virtually load the card’s balance each paycheck. Keep in mind, however, the possibility of lost or stolen cards and any associated fees for setting up the card or ATM transactions.
Cash: In an increasingly paperless world, cash paydays are falling in popularity. While it is technically an acceptable way to pay your employees, you’ll need to take extra care that you keep an paper trail that documentations payments and associated taxes for cash payments. Out of all four methods listed, this is the one we’d be least likely to recommend.
Once payroll is set up
Having everything ready for your first pay run can also mean taking a few more smart steps, some of which are also required by labor law.
Cover your business with Workers’ Comp
Avoid being a cautionary tale and get yourself a Workers’ Comp policy. Workers’ Comp protects you and your employees in case of an accident or injury in the workplace.
Some states (like Oregon or Washington) mandate that you obtain workers comp coverage through a state department directly, while other states have minimum coverage requirements. Check out the Workers’ Comp requirements for your state.
When purchasing coverage, you’ll usually often see two different types:
Traditional: At the beginning of the premium period, you’ll estimate your payroll for the policy period and pay a corresponding lump-sum premium up-front. You can then be subject to an audit at the end of the policy period to confirm, by analyzing the payroll, that you did not underpay your premium. This could mean an extra bill later down the road.
Pay-as-you-go: After payroll is processed, payroll information is submitted to the provider directly for a calculation of the premium. This minimizes both the risk of an audit at a later date and it can end up saving you both time and money in the long run.
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Add some wall decor with a labor law poster
Federal and state employment law require employers to post a state-specific labor law poster in the an employee-accessible common area.
Posters are industry-specific, and they must be up-to-date (1985 was a probably a rockin’ year but poster-wise it isn’t compliant anymore) and can easily be ordered online.
Think about benefits
If economically feasible for your business, offering employee benefits like health insurance or retirement options can go a long way toward attracting and keeping great workers. As a business owner, you’ll get to take advantage of them, too.
Here are some common benefits to consider:
Health, Dental, Vision, Life, and Disability Insurance: Small employers (those with less than 50 full-time equivalent employees) don’t have to provide health insurance coverage to their employees. However, health insurance is an attractive benefit to offer potential employees to keep them (and their families) healthy and happy. Some health, dental, and vision insurance programs can also qualify as a pre-tax deduction, which reduces the taxable wages for both the employee and you as the employer. If you are working with a payroll provider, see if they have a licensed insurance agent on staff to walk you through your options.
Retirement Benefits: Only half of American workers have any retirement savings at all (yikes!). Peace of mind and security for the future can weigh heavily for your employees, so help them ease this burden by looking into offering one of several available retirement options (401(k), Roth 401(k), Simple IRA, among others):
A 401(k) plan is a pre-tax retirement plan that allows employees to set aside a portion of their pay for investing. When they retire and withdraw these funds, they are then taxed at that time. As an employer, you can match an employee’s contributions to their plan and even qualify for a $1500 tax credit to help offset the cost of offering a plan.
Similarly, a Roth 401(k) allows the employee to set aside a portion of their pay for investment. However, this is a deferral from their post-tax wages. If an employee anticipates that they will be in a higher tax bracket at the time of retirement, this may be the better option for them.
A Simple IRA (Savings Incentive Match Plan for Employees) can be an attractive option for employers because, typically, these plans do not have the same start-up costs as other traditional retirement plans. These plans are available exclusively to small businesses who offer no other retirement plans and are a set up as a pre-tax deferral.
Understanding which retirement plans you should (or can legally) offer as a small business owner can be overwhelming to say the least. To be able to focus your attention to other operational matters, consult with your CPA, financial advisor, or a retirement plan provider for more information.
Vacation and/or PTO policies
Consider if you’ll offer employees PTO, and what type of sick and vacation policies you want to set up. Some employers let their team accrue time off based on hours worked, the number of pay periods that go by, or even in one lump sum at the beginning of the year.
Also consider state requirements. Some states require a minimum amount of sick time, and some states also have requirements about how unused PTO is paid out upon an employee’s termination.
Now you’re ready to start running payroll
Is that Eye of the Tiger playing? Get ready for a Rocky-inspired victory run, because you not only made it to the end of this article, but you know everything you need to know to set up payroll successfully.
If you need any help, feel free to reach out. OnPay is a cloud-based payroll service provider that can help you cross payroll, benefits, and HR off your lengthy checklist.