How to Set Up Payroll for a Small Business

Learn how to set up payroll for a small business effortlessly with this step-by-step guide.

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Author By Team Roll on April 25, 2022
Reading Time 5 min read

Setting up payroll for the first time as a small business can seem pretty intimidating. With so many moving parts regarding payroll taxes, full-time employees, and contractors, it’s really easy to put it off as long as possible. But in order to grow your small business, payroll really is essential. That’s why we’re here at Roll, to make it as easy as possible. Learning how to set up a payroll for a small business entails several key steps along the way. Here is a short summary on how to set up a payroll account. .

1. Apply for an EIN: Obtain IRS EIN for identification.

The first step when setting up your payroll is applying for an EIN (Employee Identification Number) from the IRS. An EIN is a tax identifier for your business. Think of it as a social security number but for businesses as opposed to individuals. 

Applying for an EIN is free and relatively simple. You can visit the IRS website and apply for one electronically. Assuming you meet the basic criteria, these numbers are generally provided instantly.

Alternatively, you can also mail or fax a completed SS-4 IRS form to the IRS service center in your state. Faxed applications take about two weeks to receive an EIN, while a mailed application will take about four weeks to process.

Once your EIN is secured, you can proceed with setting up payroll for a small business.

2. Acquire a State Business ID: Get state ID for taxes.

Depending on your state and local government, you will likely need to obtain a state or local business ID. This is needed for collecting state and local taxes in areas where income tax is assessed.

The collection process will vary from state to state, so you’ll need to consult the Secretary of State where your business is located for details on what is required.

3. Create Payroll Policy: Define wage and holiday policies.

You will need a written set of policies that are then agreed to by employees. These policies cover how wages and payment schedules will be handled as well as holidays and other special circumstances which affect employee payouts.

These policies must be in accordance with federal and state laws regarding employee rights. Be sure to check with the specific laws for your business location if you are unsure how payment issues are handled.

A few key points to include in any payroll policy are:

  • Pay periods
  • Paid time off
  • Overtime
  • Non-mandatory leave
  • Holidays

One thing to note is that certain union workers may have rules that determine how often they are paid. These rules may also play a factor in how long after performing work that payments need to be made.

Depending on your payroll service, more frequent pay periods will likely cause an increase in fees, so try to find a payment schedule that works for your employees and keeps extra fees at bay.

4. Separate Bank Account: Use dedicated account for payroll.

Although not necessary, many businesses use a separate bank account that is only used for payroll-related expenses. Doing so can make accounting much easier and creates a clear separation between payroll and other business finances.

To open a payroll account, contact the bank that handles your business’s other accounts and services and ask about setting up a separate payroll account.

Additional fees may be associated with operating a second account for payroll purposes. Be sure to ask about ways to possibly help lower these fees.

5. Worker’s Compensation: Secure mandatory insurance coverage.

Worker’s compensation varies from state to state. That said, many states require businesses to have worker’s compensation insurance. This can be purchased privately or can also be purchased through the state in some cases.

You will need workers' compensation coverage even if only one of your employees lives in a state that requires it.

Details like this are important when learning how to do small business payroll.

6. Offer Optional Benefits: Enhance benefits for attraction.

Pay attention to your benefits package to attract and keep the best of the best. Consider adding features like health insurance, life insurance, dental insurance, and retirement plans. As employees typically cover the cost of these plans through paycheck deductions, deciding on benefits is an important step.

7. Understand Employee Classification: Distinguish between contractor and employee.

In the U.S., there are two different types of employment: "employment" and "independent contractor."

Independent contractors are self-employed persons who perform services, have no authority to hire or fire or determine employees' pay and hours, and are not subject to labor employment laws.

Employees are those individuals who enter into an agreement with another person, hereinafter called an "employer," in which the employer agrees to provide them with some type of compensation for a certain amount of work.

Employers must establish whether the person is an independent contractor or an employee.

The distinction between independent contractors and employees is very important because employers must pay Social Security, Unemployment Insurance, and Income Tax for employees but not for independent contractors.

Furthermore, employers must withhold Social Security and FICA (unemployment) taxes only on those considered employees.

8. Choose Payroll Schedule: Decide frequency for payments.

When thinking about how often to pay your employees, think about what kind of employees you are hiring. Are they full-time salary or hourly contractors?

When reviewing how to set up a small business payroll, note that hourly employees typically do best with a weekly or bi-weekly pay period, whereas salaried employees do well with a semi-monthly pay period. If you have both, look into having multiple schedules — don’t worry, Roll can do both. We’ve got your back.

9. Complete Employee Paperwork: Fill I-9, W-4, W-9 forms.

There are different kinds of paperwork for salaried versus contract employees. All new employees, regardless of salary or contract, need to fill out an I-9 form to verify their identity and the right to work in the U.S. From there, if they’re salaried, have them fill out a Federal Income Tax Withholding form, also known as a W-4. If they are contractors, they’ll need to fill out a 1099 form, also known as a W-9. These forms will help you determine the correct amount of income tax to withhold from their paychecks – that's if you withhold any at all.

10. Select Payroll System: Choose an efficient system, like Roll.

Find a payroll system that makes your life as a small business owner easier, not harder. That’s why Roll by ADP was created. It’s the first-ever chat-based app technology to help walk you through any issues you have, whenever you have them — whether you’re adding new employees to your existing payroll or rewarding employees with a raise or bonus. Say goodbye to long wait times on hold or support that leaves you with more questions than answers.

Roll helps you set up your system and employees for effortless and automated payroll. We’ll even calculate, deduct and pay your payroll tax withholdings for you. Roll is fully backed by ADP, the largest payroll company in the U.S. And ADP has its perks, like our payroll protection. If for any reason our suggested tax filings are incorrect, we’ll cover the cost, guaranteed. So know that when you do payroll, you’re doing it right, every time. And that’s one less thing you need to worry about when it comes to your small business.

11. Pay Employees Efficiently: Utilize Roll for payments.

With Roll, not only can you pay different types of employees on different pay schedules, but you also have the option to pay your employees through direct deposit or check.

We offer next-day direct deposit or same-day payment through a company check. So no matter where or how your employee wants or needs to be paid, we offer options and payroll in all 50 states.

The extra bonus about Roll is that it gives your employees access to all of their pay stubs, tax statements, and benefits information right within the same app. Which is one less thing you’ll have to do for them. Score! So what are you waiting for? Get started on growing your small business with Roll.

For more details about each step, please continue reading below

Setting Up Your Payroll FAQ

How do I set up a payroll for one employee?

Setting up payroll for a small business includes the following steps:

  • Obtain an EIN
  • Request a state business ID
  • Set pay wages and payroll policies
  • Collect tax documents for the employee
  • Open a separate bank account, if needed

How do I manually calculate payroll?

Calculating payroll manually is possible, but it can be rather tedious and prone to errors.

To start, you will want to have followed all the guidelines above to prepare for calculating your employee’s paychecks.

Next, you will want to calculate gross wages. This is all wages paid before any deductions, including hourly pay, salary, and tips. Other types of fringe benefits may also need to be added if they have cash value and are taxable.

After that, you need to deduct the pre-tax amount from each payment. This includes money taken out pre-tax such as 401(k) and health benefit premiums.

Then comes the most challenging task, calculating each employee's withholding. This amount will vary for each employee as it correlates directly to how they filled out their IRS W-4 form. It is one of the more challenging components to master when learning how to set up payroll for a small business.

It will also be dependent on your state and local tax laws. For federal taxes, you can consult with the IRS 15-T supplemental guide, which shows you the withholdings based on certain criteria.

You will also need to calculate FICA taxes, which include Medicare and Social Security. Keep in mind employers are required to pay half of FICA, federal unemployment tax, and state unemployment tax. The employer contribution is separate from the employee contribution for these taxes. Check with your state or local government for the exact withholdings.

Finally, deduct the employee withholding amounts from the gross earnings to determine the final amount of the employee’s net pay.

Double-check all information before remitting payments.

As you can see, this method can be extremely detailed, and mistakes or omissions are very easy to make. This is why it is often wise to use payroll software, even for small businesses with only a few employees.

How long does it take to process payroll?

The time it takes to complete payrolls manually is determined by how much manual data entry is involved in compiling the payroll. This time can range from hours to days, depending on the complexity of your payroll process.

What if this time could be reduced to less than a minute? With Roll by ADP, it can be. This innovative payroll and HR software solution, part of ADP's integrated suite of apps, is specifically designed for small businesses. With it, small business owners can streamline the way they manage payroll. 

Roll by ADP simplifies the payroll process by providing an online portal to update employee information, make edits, and enter changes. In addition, it can be set up to connect with bookkeeping, accounting, and payroll providers, making it easy to shift information back and forth.

What is the most significant payroll challenge for small businesses?

As a small business, you need to handle all of the intricacies of a big business while still working within the confines of your budget. Payroll management is one area that can cause significant challenges for small businesses, as they don’t have the money or time to hire a high-level HR professional who can accurately manage and maintain payroll records.

What are the common mistakes during the payroll process?

The most common mistakes during the payroll process are:

  • Paying the wrong person
  • Employers not paying taxes on time
  • Paying too much or too little in Social Security, Medicare and federal withholding taxes
  • Forgoing annuities when they may be beneficial
  • Paying your employees too much money when it is not due to be paid
  • Not taking care of workers' compensation claims and other types
  • Failing to correctly classify employees as exempt or non-exempt
  • Failing to offer required paid sick leave, vacation and holiday time

Should I manage payroll myself or use payroll software?

Several factors will determine the answer to this question. The first is whether you have the skill set to manage payroll.

Learning how to do payroll for a small business takes dedication. After all, understanding how to comply with all federal, state, and local laws isn’t easy.

Next, you need to decide if it’s cost-effective for you to do it yourself. You’re likely already busy with management tasks and day-to-day operations if you run a business. Dealing with how to set up payroll may not be something you have time to take on.

Whether to outsource payroll or do it yourself will ultimately depend on what setup best suits your business operations. 

Small Business Payroll • Business Basics • Small Business • Payroll
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