As a small-business owner, you need to determine how to best setup and manage your payroll system—whether you have just hired your first employee or you plan to hire in the near future. Payroll can be a complex process governed by legal obligations that affect you as the employer and can lead to penalties if not handled correctly. This checklist can assist you in the planning and setup of your small business payroll:
Planning your payroll system
- To begin the payroll system planning process, you will need to determine the following:
- Will employees be paid an annual salary or hourly based on time sheets or time clocks?
- Will your employees be paid weekly, biweekly, bimonthly, or monthly?
- Will paychecks be processed directly into employee bank accounts or by check?
- What other payments, deductions, and employee benefits need to be factored in(such as retirement savings, health care benefits, long term disability, life insurance etc.)?
- How will you account for bonuses, overtime, or allowances?
- Will the payroll process remain in-house or be outsourced to an external vendor?
- If you outsource payroll, which parts of the process will be owned by the external vendor?
- Payroll requirements planned
TIP: If you have more than a small handful of employees, you may want to look at using a simple software accounting solution that includes payroll functionality in order to automatically prepare your payroll in-house and avoid costly outsourcing fees.
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Establishing policies and procedures
- Draw up a payroll policy and procedure document that includes the following to cover all your legal obligations:
- The timing of paychecks (e.g. weekly, biweekly, or monthly)
- How new hires, terminations, and pay changes will be submitted to payroll
- Who can authorize schedule changes, overtime pay, changes to pay rates/salaries
- The rules for payment during work absences (e.g. sick days, holidays, maternity/adoption/paternity leave)
- The definition of overtime for hourly employees
- Safety and workers’ compensation policies
- Vacation pay accrual calculations
- Any other applicable state requirements
- Payroll policy and procedure document drawn up
TIP: Using a software accounting solution that includes payroll and HR functionality can automate many of the processes listed above—saving you time and money.
Assigning payroll responsibilities
Identify a point person who will be responsible for payroll. Even when an external vendor is used to outsource payroll, it is necessary to have a company liaison who can gather and double check the information that needs to be processed.