How to Start a Payroll

Having to hire employees means that your hard work has paid off and your business is growing beyond what you can accomplish on your own. Make sure you're prepared for the responsibilities and liabilities that go along with paying employees.

Difficulty:

Challenging

Instructions

Things You'll Need

• Ledger Books
• Small-business Accounting Software
• Ledger books

1. Obtain a Federal Employer Identification Number (FEIN) by completing and submitting Form SS-4 to the Internal Revenue Service.

2. Require each employee to complete IRS Form W-4 and Immigration and Naturalization Service Form I-9.

3. Decide how often you'll pay your employees - weekly, biweekly or monthly.

4. Decide how you'll determine each employee's pay. Will you pay by the project, by the hour or on commission?

5. Monitor how many hours employees work each pay period by using time cards. Each employee should fill out and sign his or her time card and have a supervisor sign it before turning it in to the person preparing payroll checks.

6. Set up a ledger dedicated to recording all employee payments. Create ledger categories for the check date, gross amount earned by each employee, the employer's contribution to Social Security (FICA), and deductions withheld from each payment for items such as taxes, health insurance and advances on pay.

Tips & Warnings

• Check with your state's Department of Revenue to find out if you're required to withhold state tax from employees' checks or to file reports in addition to the ones you send to the IRS.

• A completed Form W-4 provides the employer with the information necessary to withhold federal taxes from an employee's paycheck and to report payment information to the IRS. An employee must also complete INS Form I-9 to prove his or her eligibility to work in the United States. Keep these forms on file with your other employee records.

• The IRS will send you Publication 15, Circular E, Employer's Tax Guide when you register as an employer. This publication explains all of your federal tax obligations as an employer, contains current withholding rates, and outlines your tax deposit, filing and record-keeping requirements.

• Consider opening a separate bank account for payroll if you have a significant number of employees. This will make keeping track of your tax deposits and gathering information for filing reports easier.

• Most financial software programs have the ability to produce payroll and assist you in meeting filing requirements.

• If all of the demands of maintaining an accurate payroll overwhelm you, check out a payroll service. A payroll service will issue checks to your employees and fulfill all of your federal and state filing requirements in exchange for a small fee.

• The money you withhold from an employee's paycheck is not yours to spend. If you fall behind in your tax deposits, the penalties are severe and the IRS will not hesitate to start collection proceedings to recover the taxes.