Setting up a Payroll System.

Every business realizes that making payments to employees is not as easy as writing a pay check every two weeks. There is much more that goes into making an employee small business payroll service.

Employee compensation is governed by more than a dozen laws. And if you dont want to get into trouble with the government agencies, then you need to organize your payroll system in accordance with the Federal and state guidelines and stay up to date with the amendments made in the guidelines by these agencies from time to time.

This all goes on to necessitate the setting up of a proper small business payroll service that complies well with the regulations of the time. To help a small business owner get started with the setting up of a simple payroll system we have enlisted a step by step approach.

Step one: the first requirement for a small business payroll service is to fill in a SS4 form and submit it to IRS, to get employer identification number. Any business which employs even one person needs to have this employer identification number. And remember that if you already have an employer identification number for some other business you still have to apply for a new employer identification number for your new business.

Step two: certain areas may require that you get a local identification number along with the state identification number for operating your business in a specific area. If it is so you will have to get these numbers as well before proceeding any further.

Step three: every business has employees working for them on a different basis like there would be some people employed on an independent contract basis and there are others who are full time or part time employees. You need to separate out employees who work on a contract basis and those who are your permanent employees. A small business payroll service is not required to withhold any payroll taxes for people who work with it on an independent contract. To those who started thinking that taking all employees under contract basis could save them from generating payroll taxes, then you are mistaken as you surely cannot have all your employees as independent contractors. Showing the regular employees as contract employees can invite a lot of penalties for your small business from the IRS. If you really want to understand more of this you can consult the publication fifteen of IRS, especially the circular E which pertains to this aspect.

Step four: an important document which serves as the most central piece of information, regarding an employees social security number and the allowances that the employee claims for the purpose of withholding income tax, is the W4 form. This form is supposed to be filled in by each employee and submitted with the IRS.

This form is required to be submitted not just for the new employees but also when an employee wishes to make changes in his payroll taxes. For instance when an employee gets married or divorced, or in case of increase or decrease in the number of dependents the employer would be required to submit a new W4 form indicating the changes to be made to his payroll tax structure. In case the number of dependents is decreasing the payroll taxes will also come down and in case of increase in the number of dependents the payroll taxes are also bound to increase. Whatever is the case, a new W4 form is required to be completed, signed and submitted to IRS.

Any employee for whom the W4 form has not been filed will be treated by the law as a single person and thered be no exemptions given to such employees for withholding purposes.

Step five: most states require the business to establish a payroll period for all their regular employees, specifying paydays on which the employees will be paid. In certain states you may be required to pay on a monthly basis while there are others which may want you to pay your employees on a bimonthly basis. So you will have to check up with the state government for the specific guidelines and establish an employee payday schedule.

Step six: every small business is required to maintain certain payroll records and here is some of the information that must be filed in:

* The details of the employee such as the name, the address and the social security number.

* The amount of paycheck given along with the date of each payment.

* The taxable wage portion of each paycheck.

* Copies of the W4 forms for each employee.

* The copies of the returns that have been filed by the business.

* The amount of payroll tax deposited along with the date on which it was deposited.

Step seven: the business needs to decide whether the employees will be compensated for the time that is spent on orientation, for sick leave, meals on the premises and so on; you must also ensure that youre complying with the state department of labor regarding these issues.

Step eight: there are rules and regulations governing the overtime that is done by employees and you must make provisions for the same. In most states the practice is that all work hours above 40 hours in a week are treated as overtime and need to be compensated with a one and a half times of the employees hourly wage.

Step nine: you need to figure out exactly how much to withhold from each employees paycheck as per the regulations of the IRS. At times the state and the local government may also require you to withhold some percentage from the employees paycheck. Once you have established the pay structure for the employees you can use the tax tables provided by government to calculate the amount small business payroll service that must be withheld. Most state governments impose a personal income tax.

The process is simple but time consuming and to save on money and time some of the small businesses prefer to hire a payroll service company to carry out these tasks for them. The other advantage is that errors can be avoided by hiring professionals. An outside firm would provide you with most services relate to payrolls such as tax payment, handling of W2 and W4 forms and taking care of insurance and retirement plans.