Skip to main content

As your business grows, you’ll need to adopt a more sophisticated payroll process to manage your increasing employees and their compensation. Payroll is one of the biggest pain points for small businesses facing growth, and business owners can lose dozens of hours each month running payroll. Instead, we recommend using smart payroll software to help you save time, accurately measure pay, withholdings, and tax filings. 

Hopefully you’ve read our guide to choosing payroll software (we give you nine important elements to consider) and you’ve made the decision that will work best for your company. Now you’re ready to get your payroll service set up and running payroll for you. Where do you start? We’ve got you.

What documents do I need to set up payroll?

In order to set up accurate withholdings and payroll taxes within your payroll software, you need to gather documents and information for your employees and business. You’ll need the following to set up payroll: 

Your payroll service may have an employee portal which will allow you to gather the necessary information easily (and allow employees to change their options at will).

How do I set up payroll for contract vs. full time employees?

It’s important to classify your employees correctly when you set up payroll, as it will affect the way their taxes are withheld and how overtime is calculated. 

Exempt employees do not get paid for overtime hours, and must be paid a salary. 

Non-exempt employees do get paid for overtime hours, and can be paid wages or salary.

You will need to manage your payroll taxes for all full time employees, including: 

  • Income tax withholding (determined by each individual employee via a Form W-4), both federal and state.
  • FICA withholding 15.3%, for which you cover 7.65%.
  • FUTA and state unemployment withholding.
  • Any additional withholding from employee paychecks, such as 401(k) contributions, flexible or health savings accounts, or child support garnishment.

Confused about your payroll tax responsibility? Check out our 2021 payroll tax guide.

Should I keep payroll in-house or outsource?

Payroll processing definitely takes time and attention to detail—even when you use a payroll service provider. Small businesses may not have the luxury of dedicating hours each week to running payroll, so payroll outsourcing may be worth the cost. By using an online payroll company you can enter in all of your details and have payroll run start-to-finish for a nominal fee. 

Completely outsourcing your payroll will cost you around $100 per employee, on average, but could save you 20+ hours per month. If you have a limited finance team and need every hour to manage your business, that might be worth the additional $60-80 per employee per month. Keeping your payroll in-house will save you money but cost you time. If you’re confident in your finance team or your ability to manage payroll processing then stick with it as long as you can. 

One compromise that will allow you to keep your payroll in-house but save you time is automated payroll processing. Some payroll software solutions allow you to set up ongoing, automatic payroll that requires far less input from your payroll department.

How do I choose pay periods?

Your pay schedule will have a significant impact on your employees, and setting up a new payroll service is the perfect opportunity to investigate different options. You need to consider your state regulations, and the number of exempt vs. non-exempt workers (hourly workers usually prefer weekly or biweekly payroll cycles). 

Once you’ve considered these factors you can choose your pay frequency (weekly, biweekly, semimonthly, and monthly) and set it up in your payroll system.

Document your employee compensation

There are a lot of factors that go into payroll—not just sending a check on payday. You have to manage hours, payroll taxes, paid time off, overtime pay, and other benefits that can affect paychecks. Make sure your HR team is carefully documenting employee benefits, compensation, policies for paid time off and overtime pay, and the withholding for health plan premiums and 401(k) contributions. Keep your documentation handy and be sure it is reflected in your payroll records. 

Some payroll providers feature many combinations for payroll processing. QuickBooks Payroll is a popular add-on to your accounting software, and allows you to choose a payroll plan that fits your unique needs and manages all the moving pieces of your employee payroll.

Run your payroll

Are you ready? It’s time to run payroll for the first time. Double check all of your information (with the help of your accountant) and then let your payroll software do the heavy lifting. Once you’ve run the first round of payroll, be sure to have employees look closely at their pay stubs to ensure it reflects their proper withholdings and employee status. 

Payroll taxes should be withheld and deposited to a designated bank account. Then each quarter you’ll submit your quarterly estimated taxes (which include payroll) to the IRS. Some payroll providers will also submit these payroll taxes for you, so if you have that option be sure to link it to your IRS payment account.

What are payroll taxes?

Payroll taxes, or employment taxes, are the taxes withheld from an employee’s paycheck by the employer and paid to the IRS on a quarterly basis. These taxes include: 

  • Income tax (state and federal)
  • FICA (Federal Insurance Contributions Act: Social Security tax and Medicare tax)
  • FUTA (Federal Unemployment Tax Act)
  • State unemployment tax

Use your payroll provider resources

Today, nearly all software providers create a knowledge base or help center for their product. As you go through the process of setting up your payroll service you can turn to these resources to walk you through each step. From articles to videos to live chat, you can find resources to answer your questions as you set up your payroll software for the first time. And then you can get back to what really matters—taking your business to the next level.

Divvy gives you beautiful and powerful expense management software so you can spend smarter. Sign up for free today.

Leave a Reply

Close Menu