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5 Tips for Setting up a Payroll System for Your Business

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May 06 2022 • by Marissa Scott • Business

Setting up a payroll system for your business can be a bit complicated. Unfortunately, missing even one step in the process could subject your business to potential penalties and fines. For this reason, it’s a good idea to work with a third-party that specializes in payroll services. Many banks, including BankFive, offer payroll solutions as well.

Regardless of how you choose to tackle the setup of your payroll system, here are 5 important tips to keep in mind:

1. Be Sure You Have an Employer Identification Number (EIN)

If you have an established business you should already have an EIN, since you cannot legally pay employees without one. If you have just launched your company and hired your first employees, you will need to obtain an EIN from the Internal Revenue Service (IRS). The application to apply for an EIN is called an SS-4. This form can be downloaded from the IRS website, or you can submit it online.

Some states require employers to obtain state-level ID numbers as well. In Massachusetts, for example, you will need to register your business with MassTaxConnect to receive a Mass Tax ID. Likewise, Rhode Island employers must obtain a Rhode Island State Tax ID Number. These identification numbers are used to record state tax information for the employees in your payroll system.

2. Determine Your Company's Pay Schedule

When establishing a payroll system for your business, you will need to decide if employee paychecks will be issued weekly, bi-weekly, bi-monthly, or monthly. Most states have laws regarding how often businesses must pay their employees. Massachusetts requires employers to issue paychecks at least bi-weekly, while Rhode Island mandates that employees be paid at least twice per month.

Strict laws exist at both federal and state levels about distributing employee paychecks on time. Although you can change the payroll schedule if you have a valid reason to do so, you should avoid modifying it frequently. Doing so could attract unwanted attention from the IRS or your state government.

3. Put Employee Compensation Terms in Writing

The task of setting up a payroll system also involves deciding how you will handle the following:
  • Overtime pay
  • Paid time off (PTO)
  • Payroll deductions for voluntary benefits (if offered), such as health insurance and contributions to a retirement savings account
  • Tracking hours worked by employees
This information should be a standard part of your company’s employee handbook, no matter the size of your business. If your business makes updates to any these processes, be sure to put the changes in writing and notify employees. There are many online resources to help you through the process of creating an employee handbook. Another option is to outsource the task to a professional. It could also be worthwhile to have an attorney who specializes in employment law review your employee handbook to ensure it adheres to all applicable laws.

4. Determine Tax Obligations and Employee Withholdings

Another crucial step is to determine tax withholdings required for your employees. This could include federal, state, and local taxes. You should also look into whether or not your business must pay into the state’s unemployment and workers’ compensation funds.

The information on federal and state employer tax obligations can be dense and difficult to understand. It is recommended that you consult with an accountant or business financial advisor. Both federal and state taxing organizations mandate compliance, and you could face penalties even if you legitimately did not understand your error.

5. Consider Hiring a Payroll Administrator

Depending on the size of your business, you may choose to run your company’s payroll in-house or you may decide to outsource it. Your decision may also change as you expand your business down the road. There are advantages and disadvantages to each option, but ultimately the choice will come down to your unique business needs.

You may want to stick with in-house payroll processing if you desire maximum flexibility to make changes, but outsourced payroll services are the best bet if you are concerned with compliance. Most will assume all responsibilities associated with running the payroll, including paying any penalties assessed for payroll errors and submitting all required payroll reports.

Keep in mind that if you choose to do your payroll in-house, there are a number of software systems that can provide you with framework and guidance. If you are a small business or just starting out, in-house software may be the most affordable option as well. 

If you are a small business owner in MA or RI trying to navigate payroll and other business operations, BankFive can help. Through our partnerships with local providers, we give our business customers access to top-rated payroll solutions, as well as cash management and merchant services solutions. Schedule a free consultation with a member of our dedicated Business Banking Team to learn more!