You’ve got yourself a business, and things are going well. So well, in fact, that it’s time to hire your first few employees. Congratulations! Growing a business from an idea to becoming an employer is quite the accomplishment. But, with growth comes greater responsibilities. You’re no longer the only one involved, and if you have employees, you need to pay them. And to do that, you’ll need to set up a payroll system.
Step 1: Register as an EMPLOYER
No matter where you are, the moment you hire someone to work for you, you need to register with the government as an employer (if you haven’t already done so). The name and procedure is slightly different everywhere, but you can generally do it online, by email, fax, or telephone. In the USA, it’s called the Employer Identification Number (aka Employer Tax ID, or EIN). In Canada, it’s simply referred to as a Business Number (aka BN). If you’re located in the United Kingdom, you’ll need to register as an employer with HM Revenue & Customs.
Do check your specific location to see if you need any local or state/provincial ID numbers as well.
Step 2: Classify Your Employee(s)
Once you have at least one employee, for tax and deduction purposes, you need to establish whether they are salaried employees, part-time employees, or independent contractors. Check with your tax agency to find detailed explanations as to what constitutes each designation.
Step 3: Collect the Necessary Employee Data
You’ll need various government forms and documents, all of which should be available to download and print from your country’s federal tax organization. Have your employee(s) provide all required information (Social Insurance or Social Security Number, address, and so forth). Again, check with the revenue and tax agency in your country for specifics.
HM Revenue & Customs (UK)
Internal Revenue Service (USA)
Step 4 - Payment Schedule and Deductions
As an employer, you may be able to select how often you pay your employees, with weekly, bi-weekly, and monthly being the most common. Be aware that certain locations may have rules regarding this, so the choice may be made for you. If you’re outsourcing the payroll itself (more on that in a moment), you may be charged per payment, so weekly would ultimately be more expensive than monthly.
Beyond the payment schedule, you’ll need to familiarize yourself with the necessary deductions you need to make and withhold as an employer. Canadian companies, for example, include deductions for the Canada Pension Plan (CPP), Employment Insurance (EI) premiums, and income tax, while American businesses deduct income tax, Social Security, Medicare, and possibly contributions to a 401(K) or similar investment. In the UK, you’ll be withholding the National Insurance Contribution, amongst other possible deductions. Should you decide to do your payroll manually each pay period, you’ll need to fully understand all of this in its entirety.
Step 5: Select Your Payroll System
You have a few options:
- You could do it manually each pay period, which of course means you’re in complete control and you’ll save the money you would have otherwise paid an accountant or service to do it for you. But, it’s definitely time consuming and requires you understand all your tax and employer responsibilities.
- You could hire an accountant to do it all for you, but this will require you pay them. On the plus side, they will (in theory) ensure everything is done properly and legally.
- Do-It-Yourself software such as Intuit Payroll are readily available, and a quick Google search will give you plenty of options. There will likely be a learning curve as you become familiar with the software, but if you get something designed for your country, it will automatically deduct and withhold for you. But, there will be a price involved, either a one-time or monthly user fee.
- Outsource to a payroll service or bank. You’ll be paying per month or per payroll, so double check what’s going in. These companies will take care of everything for you, including deductions, payment processing (cheque or direct deposit), and all necessary tax documentation. Most of them are not cheap (although not super expensive, either), but they are absolutely worth it if you have the money available. A few options (by geographic location) include:
Payroll Service Providers - USA
Approved and Certified Providers Listed on IRS Site
Payroll Service Providers - Canada
Payroll Service Providers - UK
Step 6: Record Keeping
It’s important to remember that payroll and accounting are, in fact, separate entities. Payroll is a cog in that wheel, yes, but they are not the same thing. You need to keep meticulous records during the year, so that everything is ready come tax time. Whether you do your own taxes, or hand everything over to an accountant, proper record keeping as relates to your employees and payroll make everyone’s life that much easier. Payroll software and payroll service providers make this super simple, as the documentation and records are done automatically.
Other Useful Links
See also: How to Prepare Payroll in Excel
The basic procedure is the same in most places, but do check the nitty-gritty details for your specific country. A quick visit to the federal tax agency website will usually provide the specifics you need to do to be a legal and responsible employer. And remember...no matter what route you take, the responsibility is ultimately yours and yours alone as the business owner. Make sure you do keep an eye on things.