Setting Up a Payroll System
As soon as your business starts to employ others, you need to set up and manage a payroll system. This system will enable you to calculate the correct deductions from staff wages or salaries, make necessary payments to the Internal Revenue Service in a timely manner, and maintain an orderly system of pay-related records.
This article explains the requirements for administering staff wages, including deductions of federal and state income tax, FICA (Social Security and Medicare payments), and health insurance and retirement plan contributions. At first glance, the process may look overwhelming, but actually it is quite straightforward, even if time-consuming.
You are responsible for ensuring that all federal and state taxes are withheld from your employees' pay, as well as payments to federal Social Security and Medicare programs. In addition, benefits that are part of the employee compensation program (medical, dental, vision, or other co-payment benefits) should be deducted. Any contributions to a retirement plan or stock purchase plan should also be reflected in the employees' pay.
You should determine a pay schedule based on the cash flow needs of your business, the cost of the payroll system per pay period, and the type of business you are in. How frequently your competitors pay their comparable employees should also enter into your decision. You can change the pay schedule; but, if a change is going to be made, it is better that the payments are more frequent rather than less.
If your organization uses temporary personnel hired through a service, you pay the contracted fee per employee. The personnel service, not your business, generates a paycheck for the employee with the appropriate deductions. Independent contractors working for your organization should submit an invoice detailing the work performed, the relevant dates, and their fees and expenses. Independent contractors are responsible for their own tax payments.
The three typical forms of employee payment:
- paper checks
- direct deposit payments
- payroll debit cards
Issuing paper checks is the oldest, and most expensive, form of employee payment. In that case, a separate check is generated for each employee, printed on specially prepared and (usually) costly paper, delivered to the Human Resources department from your company's payroll department or an outsourcing provider, and then distributed to each employee.
The direct deposit option allows employees to have money deposited directly into their bank accounts. Employees are provided with statements (or "pay stubs") that show their gross pay as well as any deductions. One of the benefits of direct deposits to employees is that the money is available to them without their effort of depositing a check at their bank. Many companies offer a choice of check or direct deposit to their employees.
The third, and newest, form of payment is the payroll debit card. This system was devised because many employees either don't have bank accounts or choose to cash their paychecks at check cashing services (which charge a high fee). Payroll debit cards are plastic cards that are designed to be used only as an ATM card or that carry the VISA(r) or Mastercard(r) logo, in which case they can also be used as a credit card. Employee pay is deposited into each employee's "account," and the money is immediately available by using the card. As with direct deposit payments, employees are provided with a pay stub or statement to show the gross pay and deductions.
For each pay period, employees should receive pay stubs or statements that show their gross pay as well as all deductions. This document is important for all employees, but particularly for those who work overtime, as it is the best way for them to track whether all their work hours are reflected in the pay system. The statement may also include information on year-to-date pay and any accrued vacation available to the employee.
You may decide to provide your employees with an annual (or more frequent) report itemizing their gross pay, deductions, and payroll-related benefits. Such a report can ensure that you have the correct information for each employee, including their address, phone number, number of exemptions, selected benefits programs and carriers, and 401k or other pension or stock option withdrawals and matching payments. You may also choose to show the employee's contribution toward taxes as well as contributions made by the company, whether to taxes or toward the employee's benefits.
The decision to keep the payroll system in-house or to outsource it to one of many payroll system suppliers will be based on the size of your company and the complexity of your payroll system. Many start-ups and small businesses find that it is not cost-effective to have an in-house payroll service. However, due to tax regulations and the complexity of the process, it may be advantageous to have your accountant take care of that function.
Outsourced payroll services may better serve you, your company, and your employees. Many services provide special packages for small businesses that can eliminate the headaches involved in keeping the payroll accounts up-to-date as well as save them money.
Many payroll services will pay any tax penalties if they make mistakes in the tax filing process. Also find out if they will do the tax filing for you.
Payroll systems are one of the best ways to demonstrate the company's commitment to employees. If these systems are designed to be on-time and correct, even with the diverse and complex deductions involved, employees know that you are paying attention to their best interests. While payroll systems are not usually thought of as a method to increase morale, these clearly presented employee reports have an immediate impact on the organization and are well worth the time spent to analyze and ensure that the best service to your employees is being provided each pay period.
One of the best ways to track the use of your personnel is to analyze the payroll system. Many employees work on a variety of projects that may cross department lines, and, as a result, are paid from a variety of budgets coming from different departments and projects. The payroll system can provide the specific information you and your management team need to track and analyze how human resources are utilized, the impact on various company projects, the amount of overhead and the contribution to profit, and more. By using your payroll system as an analysis tool, you will be better able to plan and budget both by fiscal calendar and project.
Regulatory changes will have an impact on your payroll systems. Whether the law changes on overtime payment, compensatory time, or the percentages of mandated tax deductions, make sure your payroll system or provider has the most up-to-date information available.
Consult a CPA or other outside source that specializes in payroll issues to set up a regular review of your payroll systems to ensure that you are in compliance with federal and state regulations, have adequate payroll insurance coverage, and are working with an appropriate provider.
Your business is required to pay employment taxes to the state and federal government. These taxes must be paid on time and in the correct amount, otherwise your business could incur severe penalties.
Bragg, Steven M.
American Payroll Association: www.americanpayroll.org
Jeremy Sacco, "Small Business Payroll Services: Are They Right For You?": http://ezinearticles.com/?Small-Business-Payroll-Services:-Are-They-Right-For-You?&id=109835