How to Set Up Payroll For Small Businesses in 7 Steps

how to setup payroll for small business

While starting and running a business is exciting, it comes with many hurdles, and you might not immediately think about payroll. However, once you hire your first employee, setting up payroll becomes a necessity. With an informed approach, payroll can become a regular part of your operations, ensuring that you are doing everything by the book and keeping your team satisfied with how you handle their pay. 

If you want to know how to setup payroll for small businesses, NLS is happy to help. If you’d like to tackle it on your own, here are some tips. 

payroll setup small business California
payroll setup small business California
how to setup payroll for small business
how to setup payroll for small business

Overwhelmed With Handling Your Business's Payroll?

Navigating the 7-Step Process to Setup Payroll For Small Businesses

Leaf
Leaf

Step 1: Determine Your Business and State Requirements

To ensure compliance and eligibility for tax benefits, you must register your business in the state (or states) where you operate. This process varies depending on your business structure (e.g., LLC vs. corporation vs. partnership). However, you’ll most likely need to register your business with the Secretary of State’s office or a similar state agency. Registration requires providing information about your business, such as its name, location, and management structure.

Additionally, you may need a state tax ID number (separate from your federal “Employer Identification Number” or EIN) for state tax purposes. Each state has specific requirements, so it’s important to consult your state’s government websites or the U.S. Small Business Administration for guidance​​​​​​.

Step 2: Gather Employee Information

Before processing payroll, you must collect information from each employee, including their legal name, address, and tax withholding preferences. This is usually obtained through forms like the W-4 for federal taxes and similar state forms, depending on your state(s) of operation. Ensure the information from these tax documents is accurate and securely stored to maintain compliance with federal and state regulations regarding employee privacy and tax reporting. Proper handling and security of employee information also protect against identity theft and ensure accurate tax withholding and reporting​​​​.

 

Step 3: Classify Employees Correctly

Correctly classifying workers as independent contractors or employees (exempt or non-exempt) is vital for tax purposes. Misclassification can affect tax obligations, such as income tax withholdings and employment taxes, and create significant liability if not done correctly. The IRS provides guidance on this distinction, considering factors like behavioral control, financial control, and the relationship type. If unsure, Form SS-8 can be filed with the IRS for an official determination​.

setup payroll for small business in California

Step 4: Decide on a Payroll Schedule

Choosing a payroll schedule depends on legal requirements, cash flow, and employee preferences. Common schedules include weekly, bi-weekly, semi-monthly, and monthly. Some states have specific minimum pay period requirements, so it’s important to be aware of these laws when deciding on your schedule. For instance, California requires non-exempt employees to be paid at least twice monthly. We recommend checking your state’s Department of Labor website to confirm your state’s requirements. We recommend considering how each option fits with your business operations and employee needs before making a decision.

Step 5: Include Payroll Policies in your Employee Handbook 

An effective employee handbook should mirror your business’s culture, values, and practices. On top of covering general employment information, anti-discrimination and harassment policies, and standards of conduct, your handbook should detail your payroll policies. It’s critical to communicate the payment schedules, methods, and any other policies regarding advances or loans to employees. 

Providing pay in advance, in particular, should be treated with caution as it essentially constitutes an unsecured loan to the employee. This practice can affect your cash flow and may introduce complications should the employment relationship end unexpectedly. 

 

Step 6: Understand Legal Requirements

A small business owner must understand state and federal employment laws. These laws establish the foundation for a fair, safe, and legal workplace, including how you handle payments. Here’s a breakdown of why this matters:

  • Minimum Wage Laws: The Fair Labor Standards Act (FLSA) sets the federal minimum wage and overtime pay requirements. Since states can set higher rates than the federal minimum, you need to pay attention to the laws in your state. For example, as of 2024, California’s minimum salary for exempt employees is $66,560 per year. Salaried employees, therefore, must earn that figure as a bare minimum to be exempt from overtime pay regulations. 
  • Employment Tax Rates: Compliance with the Federal Insurance Contributions Act (FICA) is non-negotiable. As a business owner, you are required to withhold Social Security and Medicare taxes from employees’ wages and pay a matching amount. Missteps in tax payments or misclassifying employees as exempt can lead to penalties, so you will want to make sure you have a strong knowledge of these tax obligations.
  • Wage Theft Protection: The Wage Theft Protection Act mandates that you provide non-exempt employees with a notice detailing their pay rate and other wage information at the time of hire (form 2810.5). This is important for the transparency and accuracy of your payroll processes to prevent wage theft​​. There is also a variety of information which must be included on a pay stub.

Step 7: Choosing a Payroll Service Provider

setup payroll for small business in California

Choosing between in-house payroll management and outsourcing to a service provider is a significant decision for your business. Managing payroll yourself offers more control over the process and can use existing employee expertise, potentially saving costs compared to outsourcing. However, it can also be time-consuming, complex, and prone to errors, which might result in penalties. 

Outsourcing payroll, on the other hand, can save tons of time and reduce the burden on internal resources, ensuring compliance with tax laws and providing access to expert assistance. While this second option involves additional costs, the benefits of avoiding common payroll mistakes and achieving overall compliance and integration with other HR functions often outweigh any drawbacks​​​​​​.

When looking for a payroll service provider, there are many elements to consider, including:

  • How many employees do you have? Some payroll companies cater to 50+.
  • What type of employees do you have? Platform strengths vary if you have primarily exempt or non-exempt employees.
  • What do you need from your payroll system? Just timekeeping? Onboarding? Benefits integration? Recruiting module?
  • How much customer service do you need? Some of the larger payroll firms are notorious for being hands-off but still are typically more expensive (by a lot!) than smaller firms. 

 

Contact us for examples.

Invest in Our Payroll Services for Peace of Mind

Setting up payroll can be a complex and time-consuming assignment, but it’s essential for your business’s success and legal compliance. If you’ve been having trouble setting up your company’s payroll, why not let experts handle it? At Next Level Strategies, we offer comprehensive payroll services designed to meet small and mid-sized businesses’ unique needs. Our services include payroll setup, processing, new hire onboarding, separations, and systems integration, all aimed at paying your employees accurately and on time. 

Ready for hassle-free payroll? Get started today with Next Level Strategies, and never stress about payroll again!