Setting up your first payroll in 4 easy steps

Running your first payroll can seem daunting. You’ve already gone through a lot of work to start your business, register for tax accounts, hire employees, and complete paperwork. You may be feeling like the payroll process has too many moving parts to keep track of. 

The good news is that running your first payroll doesn’t have to be arduous. Follow the steps below to set yourself up for success and run a successful first payroll. 

Step 1: Decide on your payroll-related policies and procedures

Before you can get down to paying taxes and handing out your employee’s paychecks, decide on what your payroll system and policies will be. Deciding how you want to handle payroll in advance is a good idea. It can be tricky to change policies once you have employees working and you are running payroll. 

Choose the right payroll schedule for your business

A key part of payroll is your payroll schedule. A payroll schedule is a combination of a pay period (how long your employees work) and a pay date (the day they get paid). If you have hourly employees, you will likely choose a weekly or biweekly schedule. 

If you have salaried employees, you might decide on a semi-monthly schedule. And if you have both, you may want multiple pay schedules. 

Document your policies so employees can easily access them

Once you have decided on your pay period and paydays, write them down into a formal policy. If you are going to have a delay between the pay period and pay date, also known as payroll in arrears, make sure to note that too. 

If you expect employees to create a profile with your online payroll provider, make sure that is written down with instructions so they may successfully sign up. 

Step 2: Gather hours and calculate wages

Once your payroll policies are good to go, you’re ready to gather hours worked and calculate everybody’s wages.

Record hours worked, overtime, and time off 

If you have hourly/non-exempt employees, it is important that you record their hours worked accurately. Check your time clock to see exactly how many hours all of your employees worked for the pay period. Make sure to note if anybody worked overtime so that you can accurately add that in as well. 

If you have salaried/exempt employees, you won’t need to record hours worked for the pay period. It doesn’t impact how much they get paid. Just make sure you have everybody’s salary accurately recorded. This way you can figure out their payment for the given time period. 

All employee types may have time off that needs to be accounted for. If an employee used paid time off, make sure to note that against their balance (or account for it with whatever policy you have in place). Then pay out their wages for that time. 

If an employee used unpaid time off (like sick leave at some companies), note how much time was taken and adjust payroll accordingly.

Calculate wages for hourly employees

Once you have all the hours and overtime accounted for, you can calculate your hourly employees’ take-home wages for the pay period. Simply multiply their hourly rate by the regular hours worked, and add in any overtime at a 1.5 rate.

Step 3: Calculate and withhold taxes

This is the meat of processing payroll. Once you know your employees’ gross wages for the pay period, you can calculate the amount of taxes your business owes the IRS and the amount you need to withhold from your employees.

Employer-paid payroll taxes

Employers must pay federal unemployment, state unemployment, and FICA taxes for their employees. The federal unemployment tax rate is typically 0.6% (after reduction) with a $7,000 wage base, while state unemployment tax rates vary by state and business situation. Employer FICA taxes are 6.2% for Social Security and 1.45% for Medicare.

Employee-paid payroll taxes

You must withhold federal income tax, state income tax (where applicable), and FICA taxes for your employees. Federal and state taxes vary by person, and you will use each employee’s tax withholdings to help you calculate them. FICA for employees is also 6.2% for Social Security and 1.45% for Medicare.

Step 4: Distribute payments and pay stubs

This final step is probably the most important to your employees. They will be looking for their payment come payday, so it is essential to plan in advance how you will be getting that net pay to them. 

Initiate direct deposits or write checks

If your employees are paid by direct deposit, make sure to initiate the transfer of funds at least four business days in advance of their paychecks so that they arrive on time. This is how long it takes bank-to-bank payments done via ACH to arrive. 

If you are paying your employees by physical check, make sure you already have your business checks ready to go and you have a way to sign them. Handwrite or print out the checks when you are ready and then get them in the mail early or hand-deliver them on payday. 

Distribute pay stubs on time 

The final piece of the puzzle on payday is to deliver pay stubs to your employees. Some states have specific laws about pay stubs, so it is a good idea to check what your business must follow. 

In many areas, you must include certain info on paystubs (like remaining time off balances), and you must also deliver them at the same time as paychecks, so you cannot delay getting these to employees.

Need help with payroll? Get started with Homebase Payroll today to learn more about how easy running payroll can be each pay period.

Setting up first payroll FAQs

What is needed to set up payroll?

Generally, you need to check your state’s payroll requirements, employee ID numbers, employer identification number, payroll schedules, and a few other steps. Outsourcing payroll and payroll software is increasingly more popular with businesses these days, freeing up time for small business owners.

How long does it take to set up payroll?

Setting up your payroll for the first time depends on a lot of factors, from state laws to the number of employees. Many companies choose to outsource their payroll to payroll services like Homebase.