Updated November 16, 2020
As a new business owner, you need to focus on what’s most important for getting your company off the ground — whether that’s hiring your first employee, creating a marketing strategy, or finally sitting down to eat lunch.
But if you’re in the process of hiring employees, then setting up payroll is something that should rise to the top of your list. There are a few steps every business needs to take to make sure they’re ready to pay employees, get aligned with the taxman, and stay compliant with state and federal employment laws.
Don’t worry, it’s a fairly painless process! Here are the simple steps for making sure your company— and your payroll— are set up right.
When it comes to payroll, surrender to the almighty acronym. FEIN stands for Federal Employer Identification Number, and is assigned to your business entity after registering with the IRS.
Why is this nine-digit number important? It’s a required field for any federal tax remittance, filings, and for your employees to pay their personal taxes.
To register for a FEIN, click here to visit the IRS site.
Surprise! The registration party doesn’t stop at the federal level. Depending on where your business is located and where your employees live, you’ll need to register with local state agencies so you can make payments and file taxes to the state.
If your employees live and work in the same state, you only need to register with the department or departments in that state.
Generally, there are two types of taxes your state will be concerned with: taxes you’ll be withholding from employees (state income tax, SDI, etc.) and taxes employers are asked to pay (state unemployment). These taxes may be collected by one agency or two separate ones.
For more information on which agency or agencies you need to register with and what’s required, check out OnPay’s handy state-by-state map. This step usually takes just a few minutes online.
Each agency will assign your business a unique account number. Similar to your FEIN, you’ll need this number when you pay and file state taxes. Additionally, you’ll be assigned an SUI rate if your business qualifies for state unemployment taxes. SUI stands for “state unemployment insurance,” which employers are responsible for paying for each employee.
As a general rule of thumb, state income tax the employee owes is based on the state where an employee resides. The state unemployment tax is based on the state where your employee works.
There are exceptions to the above and “fun” state reciprocity agreements (here’s looking at you, New Jersey and New York) that can cause payroll confusion. When in doubt, contact the state agencies directly with questions and a confirmation of who you need to register with.
Do you employ anyone who works from home? This means their worksite and residence are in the same state, and you’ll need to register in that state, too. Note that this rule only applies to employees — not contractors. If you have questions, here’s how to tell them apart.
If you build it (a business), they (employees) will come. Once you’ve found the candidate of your dreams, make sure to celebrate. Hiring your first employee is a huge step. Not only is your business moving forward, but you’re helping someone earn a living.
So pat yourself on the back!
Now back to work. To properly set up payroll for each employee (and stay compliant with state and federal labor laws, you’re going to need to have your new employees fill out some paperwork:
Pro tip: It’s not always required, but it’s a really good idea to keep everyone on the same page by entering into a written employment agreement with your employees.
Payday is often celebrated, but what day will it be for your employees? Will you have one pay schedule for everyone, or multiple ones for different types of employees (like salaried vs. hourly)?
Keep in mind that each state has requirements on how often employees must be paid. The most common pay schedules are as follows:
Got questions or want to know the pros and cons? Check out our guide to choosing a pay schedule.
Don’t wait until that first payday to decide how your employees will receive their hard-earned money. As an employer, you have flexibility in how you set up employee payments, but these are the most common options:
Getting ready for your first pay run can also mean taking a few more steps (some of which are also required by labor law).
Avoid being a cautionary tale and get yourself a workers’ comp policy. Workers’ comp protects you and your employees in case of an accident or injury in the workplace.
Some states (like Oregon or Washington) mandate that you obtain workers’ comp coverage through a state department directly, while other states have minimum coverage requirements. Check out the workers’ comp requirements for your state.
When considering coverage, you’ll usually often see two different types:
Federal and state employment law requires employers to post a state-specific labor law poster in an employee-accessible common area.
Posters are industry-specific, and they must be up-to-date (1985 was a probably a rockin’ year but poster-wise it isn’t compliant anymore) and can easily be ordered online.
If economically feasible for your business, offering employee benefits like health insurance or retirement options can go a long way toward attracting and keeping great workers. As a business owner, you’ll get to take advantage of them, too.
Here are some common benefits to consider:
Health, Vision, Dental, Life, and Disability Insurance: Small employers (those with less than 50 full-time equivalent employees) don’t have to provide health insurance coverage to their employees. However, health insurance is an attractive benefit to offer potential employees to keep them (and their families) healthy and happy. Some health, dental, and vision insurance programs can also qualify as a pre-tax deduction, which reduces the taxable wages for both the employee and you as the employer. If you are working with a payroll provider, see if they have a licensed insurance agent on staff to walk you through your options.
Retirement Benefits: Only half of American workers have any retirement savings at all (yikes!). Peace of mind and security for the future can weigh heavily for your employees, so help them ease this burden by looking into offering one of several available retirement options (401(k), Roth 401(k), Simple IRA, among others):
Understanding which retirement plans you should (or can legally) offer as a small business owner can be overwhelming, to say the least. To be able to focus your attention on other operational matters, consult with your CPA, financial advisor, or a retirement plan provider for more information.
Consider if you’ll offer employees PTO, and what type of sick and vacation policies you want to set up. Some employers let their team accrue time off based on hours worked, the number of pay periods that go by, or even in one lump sum at the beginning of the year.
Also, consider state requirements. Some states require a minimum amount of sick time, and some states also have requirements about how unused PTO is paid out upon an employee’s termination.
Is that Eye of the Tiger playing? Get ready for a Rocky-inspired victory run, because you not only made it to the end of this article, but you know everything you need to know to set up payroll successfully.
If you need any help, feel free to reach out. OnPay is a cloud-based payroll service provider that can help you cross payroll, benefits, and HR off your lengthy checklist. If you’re looking for help, you can use this checklist list to compare different payroll solutions.