Getting started with payroll
Between managing employee paperwork, collecting taxes and making payments to the regional and national entities, payroll can be an intimidating task. Here are some of the steps you can take to set up payroll for your business.
1. Set a pay schedule
This is the schedule that defines when you’ll pay employees for a particular amount of time worked. Most pay periods are weekly, bi-weekly or monthly. Decide what will work best for your business depending on whether you want the simplest option in terms of paperwork and calculations (weekly or monthly) or the one that most employees prefer (bi-weekly). Every region has unique pay schedule requirements, so be sure to check the laws in your region or country.
2. Classify employees
You’ll need to make sure your employees are classified correctly for their own benefit and for that of your business. These are the main categories of employees to know.
Non-Exempt: This is an hourly employee who must be paid at or above the required federal, and, where applicable, local minimum wage, plus overtime in accordance with federal and state regulations.
Exempt: This is a salaried employee who will not have some of the rights
and protections given to non-exempt workers, like overtime. To be considered exempt, an employee must earn the minimum salary threshold established by state law (or the FLSA where there is no state law), receive a guaranteed salary and perform certain duties defined by state law or the FLSA.
For help determining whether an employee is non-exempt or exempt under national law, visit the the appropriate government agency website.
To determine whether your country imposes additional standards, visit the website of your local department of labor. It’s also a good idea to consult with an attorney.
3. Learn the tax basics
Both employers and employees need to pay national income taxes, along with regional and local taxes in some areas.
Healthcare fees and retirement contributions will also need to be taken out of your employees’ paychecks each pay period, depending on the benefits you provide and that your employees select.
For more details on national employment taxes, visit the appropriate government agency website. It’s also a smart idea to check with an accountant or tax advisor as you begin hiring employees, just to make sure you’re handling payroll taxes correctly.
4. Plan out timekeeping
As an employer, you’ll need to keep track of how many hours your employees work. Most businesses have non-exempt employees record their own time, with the owner approving those hours each pay period. Many businesses also track the time worked for exempt employees for a myriad of reasons, including easier payroll administration and benefits management. There are countless software options you can use to help.
5. Keep records for each employee
Anytime you welcome a new employee into your business, you should create a folder with the following pieces of information. Recommended information includes:
- Employee's full name and individual tax identification number or applicable employee id
- Address, including postal code
- Birth date, if employee is a minor
- Sex and occupation
- Time and day of the week when employee's work week begins
- Hours worked each day
- Total hours worked each work week
- Basis on which employee's wages are paid (per hour, per week, by project, etc.)
- Regular hourly pay rate
- Total daily or weekly earnings
- Total overtime earnings for the work week
- All additions to or deductions from the employee's wages
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
Check out the website of your local department of labor to learn about region-specific recordkeeping requirements.
In addition to the required documents, maintain a record of the employee’s salary and benefits, and consider keeping reviews, accomplishments and other documentation in the folder, as well. To keep this process as simple as possible, you’ll need to set up a system for collecting and maintaining each piece of information, whether it’s a file folder, a digital folder or both.