Setting up Online Payroll: 6 Top Tips for First-Time HR Managers

As a first-time HR manager, setting up an online payroll system for the first time can be daunting, especially if you have numerous employees and contractors. The following tips aim to streamline this process and alleviate some of the stress of setting up a new payroll system.

1. Get a Federal, State, or Local ID Number

All employers in the United States must have an Employer Identification Number (EIN), which you can apply for through the IRS. You may also need a state or local tax ID number, depending on your state and locality. Check your state's website to determine if you're required to get an EIN.

These ID numbers are used to report and file employee and employer taxes with federal, state, and local governments. When signing up for an online payroll service, you'll be required to enter this information before you can pay employees.

2. Gather the Right Employee Information Before Their First Day

Before you can pay any employees or contractors, you'll need to request some information. For employees, you'll want to have them fill out Form I-9 and Form W-4. The I-9 is a form to verify the employee's eligibility to work in the United States, while a W-4 provides you and the government with the employee's tax information, such as their name, address, and tax ID number.

You'll want to ensure you have all this information before the employee's first day to avoid any tax withholding discrepancies and possible penalties.

3. Classify Your Employees

Workers must be classified as independent contractors or employees for tax purposes. Independent contractors do not have taxes withheld, and you don't pay employment taxes on amounts earned by contractors. If you classify an employee incorrectly, you may owe the government back taxes, interest, and penalties.

There must also be a classification among employees as either exempt or non-exempt. The Fair Labor Standards Act (FLSA) mandates that non-exempt employees receive a minimum wage and an overtime rate for any hours over 40 in one week. Some states have regulations for non-exempt employees in addition to the federal government's FLSA.

4. Choose a Pay Period

You must pick a day to pay your workforce, but you'll want to select a day that works for everyone. When choosing a pay period, there are several considerations, like state requirements, cash flow, and employee needs.

Some states have minimum frequencies for pay dates, such as monthly or bi-monthly. You will also want to ensure you have the cash to cover the payroll expense on your chosen dates. And finally, your employees may desire a biweekly rather than a monthly pay period so they won't have to wait so long between paychecks.

5. Develop And Distribute a Payroll Policy

Once you have familiarized yourself with the above information, you'll need to relay that to your workers. Your payroll policy should be in writing and available for employees to reference as needed. A payroll policy includes compensation rates, paid time off, payroll tax information, pay period start and end, and pay dates. Developing a payroll policy helps reduce errors, ensure that payroll is run on time, and that you're compliant with all applicable regulations.

6. Utilize the Right Software

There is no shortage of management software intended to make the lives of business owners and managers easier. Make sure you take a look at the best payroll software and the best HR software for small businesses.

Bottom Line

Before setting up your payroll system, you must have certain information or documentation ready. As indicated above, you'll need an EIN from the IRS and possibly from your state. You should also know your company's bank account information and the signatory's details. If you migrate from another payroll system, you'll also need historical payroll data and unpaid tax liabilities.

Gathering this information prior to setting up your payroll system will streamline the process and ensure a successful experience.