Let’s kick off with a disclaimer. Setting up your own payroll system – managing the process from start to finish without any outside help – is a lot like working on your own car.
I remember the first time I changed my own oil. My grandfather had owned a fairly successful auto repair shop in Central Florida for most of the 60s and 70s. I remember him out in front of his own house, waist deep in some pea green clunker that one of his three daughters owned, trying to explain to me or my parents or a cousin how this belt made that thing turn and what it meant when the whole thing squealed like a stuck pig.
For a brief spell in the late 90s, I had visions of fixing my own car. The beauty of a day spent rolled under a car, flicking through manuals with oil-slicked fingers and leaving those black prints all over the place. I changed my oil once.
As it turns out, it’s not a whole lot cheaper, easier, or quicker to do it yourself. The oil place around the corner? It’s got a slick – ha – system in place to make oil changes quick and cheap. Payroll processors and software providers are a similar beast.
You can spend not a lot of cash and get someone to do it for you. Every week. Every month. Without any last minute calculations or misfiled forms.
On the other hand, there’s something to be said for knowing how a distributor cap works. Maybe you one day discover a love of car fixing or payroll running that changes how you live or the work you do. Or maybe you just never have to pay someone to do something you can do yourself.
Self-sufficiency is an overlooked part of many businesses, and that’s too bad.
All that said, let’s look at how you can setup and run payroll for your small business.
Small business payroll and payroll tax setup
Payroll setup is a mix of personnel management and tax form navigation. To summarize the non-obvious parts of the SBA’s guide to setting up payroll, you’ve basically got five steps to getting things stood up.
- Get the right paperwork from your employees. This will be dependant on the type of employee they are.
- Document all your pay agreements. I would suggest talking to a lawyer or enlisting the help of a legal website. While there are a lot of things you can learn to do on your own car in your own front yard, you should let someone else make the gas.
- Choose the software or system you’re going to use to manage the numbers. Even if you go completely in-house, you’re still going to need somewhere to track all the numbers and do all the calculations for taxes, etc.
- Do a dry run of the payroll system. People don’t like not getting paid. Make sure everything’s running smoothly before you run it for real.
- Run payroll for real.
- Keep track of all your documents and taxes. The IRS, shockingly, dislikes underpayment. Make sure you’re not either shorting the Man the money you owe or shorting them the money your employees are withholding.
This is the basic outline of the process and diving into a plan to tackle these steps should give you a really good idea of whether you’re cut out to do it all yourself. Back to the car idea, it’s like going to the auto shop, pricing out all the pieces, reading up on the tools, and then seeing if you can slide under your car. If you loved it and the price is right, go for it.
If you’re seven days into planning and a coupon for a SwiftLube 20 minute oil change shows up in the mail, tucked in between the ham by the pound and the gutter screens, it might be a sign.
Employee paperwork and onboarding
The people you work with will fall into one of two categories – competent or Barney Fife. No, just kidding. Barney was pretty sharp underneath it all.
Your workers will either be employees or contractors. Most of the time, you should have a clear idea of which category people fall into. If you tell the person where and how to do their work, if you continue to retain them after a specific job is done, and if you give them benefits, you’re probably dealing with an employee.
If the person is in and out based on the job, can do the work in any manner they see fit, and is on the hook for all their own benefits, probably a contractor. If you’re not clear on it, the IRS has a 20 point list to help you determine the corner cases.
If you’re dealing with an employee, you’re going to need to withhold and deposit Federal income taxes based on the employee’s W-4. At the end of the year, you’ll issue a W-2, indicating how much all those deposits added up to.
You’ll also have other obligations regarding Social Security and Medicare payments that come out of employees’ pay. On top of that, you need to track unemployment taxes, which are paid by you – the employer.
For contractors, you won’t – with some weird exceptions – be making withholdings on the worker’s behalf. Instead, you’ll pay them what you owe them and they’ll be responsible for paying their own taxes.
At the end of the year, you’ll need to provide a 1099 to any contractor that you paid more than $600 to over the course of the year.
In short – If you’ve got employees, you’ll need them to fill out paperwork ahead of time. If you’ve got contractors, you’ll have paperwork at the end of the year.
Document your pay policies
Everyone you hire should have a clear understanding of how much they’re being paid and when they’re being paid. You should have a copy of this – along with details about employment terms, policies, and other HR issues – signed and stored.
Getting this out of the way upfront means no one is left waiting for you to sort things out. It also means no one is going to get ticked off at getting paid monthly – or some other slight – and come after you for not having anything in writing.
Memory incoming – feel free to skip ahead.
One of my first jobs was moving a huge filing system from an old department of education building to a new building across town. I was 19 and working with my best friend.
I’d drive over to his house at 6AM and we’d shuffle over to the old building. Then it was hours of hitting things with rubber mallets and loading pallets onto a U-Haul. Then the foreman – or whatever the guy called himself – would come in with a bagful of Subway sandwiches and we’d sit under some oak tree and talk about smarter ways to move the shelves around.
After lunch, we’d toss the crumpled up paper wrappers into the communal bag and cram in the cab of the truck and ride across town and reverse the whole process. The new building didn’t have the air conditioner on and we’d be in there sweating in the Florida heat and full of ham sandwiches.
It was a great time to be alive.
Pick a software system to manage the payroll process
At its most basic, we’re talking about Excel. I guess at the most basic, we’re talking about Google Sheets, but Google Sheets is a clearly inferior product and you probably already have Excel. Seriously, Sheets is the worst.
In this most basic software setup, you’ll need to track time worked, total pay, taxes and other payments made on behalf of the employee, other deductions, and total pay. To figure the federal tax portion of this withholding, you’ll be reading the enchanting IRS Publication 15-A: Employer’s Supplemental Tax Guide (2017). You can find the equivalent state form on your state’s tax website.
15-A is full of tables and guidelines to help you figure out how much tax you’re going to be holding back, based on how often you pay, how much you pay, and how many allowances your employees are claiming. You can also hold everything – everything being federal income tax, employee social security tax, and employee Medicare – in one go. 15-A has you covered.
All of this is going into your spreadsheet. This way, you can keep a clear breakdown of each employee’s wages and withholdings. You can also check periodically to make sure you’ve withheld enough, year-to-date.
Remember, you’ll be repeating this with your state income tax, as well. Also remember that you’ll be collecting that state tax based on the state the employee lives in, not necessarily the one you’re based in.
If you’re overwhelmed by all the math, a) you might want to reconsider doing your own payroll or b) you might want to give some of the control over to a third party. There are plenty of accounting software options that let you compute payroll taxes as part of their basic function.
These can be great timesavers for the non-math inclined. Or maybe you love math but you have no time for foolishness. Also a good option.
Do a dry run of the system
Run the numbers for the next few pay periods to make sure everything adds up. This is pretty self-explanatory, but if you don’t do it, there is no way karma is going to let you slide.
Keep track of all your documents
If you’re running the numbers for payroll, you’re also the go to place for payment history. Employees who’ve lost their pay stubs or just want to check on their withholdings are going to be emailing you for access to those records.
In addition to the daily humdrum of document management, the IRS has you keep most employee records for four years beyond the end of the year in which the records were generated. So payroll from May 2017 should be held on to until December 2021.
You can use document management software to handle all of the archiving of records. For live data, you can setup individual sheets for each employee and share those with them. Then your employees can skip you and see – in view only mode, obviously – their own payment histories anytime they want.
That’s all there is to it
It can seem overwhelming. It’s the long look up at the mountain before the climb starts. Sometimes the cliffs loom larger than life and the trail disappears behind a rock a hundred feet up. It’s only when you get to the turn that you see the path laid out simply and straightforwardly in front of you.
If you want to have complete control over your business, make running your own payroll a skill you master. It’s easier to do now than it will be when you’ve got 50 employees and new ones coming in every week.
On the other hand, if you’ve mapped it all out and the trip is just too treacherous, forget it. There are plenty of people who will trade their expertise for your cash. Grab your favorite accountant, use one of the many payroll outsourcers, or hit up a winner from our payroll software directory.
I still dream of tinkering with my car. These days, I’m even further behind the curve, though, as the amount of technology in my car has quickly surpassed the edges of my intellect. Honestly, I managed to change a fuse the other day and felt like Einstein reborn.
Maybe the little wins are all we need.
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