How To Set Up a Payroll Accounting System
You have started your own business and hired employees. Your employees need to be paid, and you are not sure what step to take next. Setting up your company's payroll is no easy task, but it is not impossible. It takes a few simple steps to get started to writing out those weekly (or bi-monthly) paychecks. With some effort, organization and determination you will be well on your way to processing payroll.
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Instructions
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Setting Up a Payroll Accounting System
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First you must figure out when you would like to pay your employees. Business owners have a couple of different options. You can pay every week: some companies choose to do this every Monday or every Friday. You can choose to pay twice a month: generally on the 1st and the 15th of the month. Another option is to pay your employees every other week, again choosing either Monday or Friday. You must also decide if you are going to do payroll in-house using a general ledger or with accounting software. You also have the option of hiring an outside payroll agency.
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Go to the IRS website (irs.gov) and fill out the SS-4 form for an Employer Identification Number (EIN). This is a mandatory step and will need to be done in order to process all federal, state and local payroll withholding taxes.
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Get state and local tax numbers if required. Most states accept the EIN. Check with your local government agency to see which rules apply to your state.
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Go to the IRS website (irs.gov) and download the W-4 form for employees. You will want to make copies and keep extras for new hires. The W-4 forms will show the withholding status for each employee for federal and state withholding taxes.
You will have federal, state, Medicare and social security withholding taxes. Employers must also fill out state forms for unemployment taxes (FUTA). Some states also have workers compensation as well as city tax.
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Set up a filing system for payroll records. It is recommended you keep a file on each employee for all important papers. It is also required by law that you keep copies of the employee's date of birth, social security number, W-4 form and date and amount of each payment. For your company's own records you need to keep the W-2s that have been returned to you, copies of all filed tax forms and dates and amounts of all tax deposits.
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Contact your local department of labor for laws regarding sick pay, overtime, vacation, breaks and lunches. Use this information to determine if you will pay for these situations and how much.
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Determine deductions such as insurance, union dues and repayment on employee loans. Determine additions such as bonuses, advances and loans.
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Once you have all this necessary information you can start running payroll. You will give all this information to your payroll agency or plug all this information into the appropriate fields within the software programs.
Using General Ledger (keeping records by hand)
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If you decide to do payroll by hand (assuming you do all of your bookkeeping by hand), using General Ledger paper is your best option. It has all the necessary lines and columns for you to make your accounts.
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You will title this ledger page "Payroll"
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Each line down the left side should have an employee's name.
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Columns across the page should be labeled net pay, Medicare, Social Security, federal withholding, state withholding and local/city if required. Another column you will need is gross pay as well as any other deductions your company may have.
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These column headings should then have their own general ledger account. Many companies just title it "Withholdings" to keep in line with the double-entry accounting system of debits and credits.
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Tips & Warnings
Be sure to follow all state and federal laws. Failure to do so can result in heavy fines.
