Trust forms the foundation of the employer-employee relationship. Beyond daily business activities, your employees rely on you to compensate them fairly and accurately. With only 21% of US employees strongly agreeing that they trust their organization’s leadership, ensuring flawless payroll processes is crucial to building trust.
Errors like miscalculating pay, missing payroll deadlines, or not maintaining thorough records can harm your credibility as a business owner. Fortunately, the pay stubs your employees receive serve as a built-in accountability system.
Pay stubs clarify the take-home pay formula, are vital for resolving discrepancies, and are often necessary for employees to reach significant life milestones. Maintaining accurate records and encouraging regular review of pay stubs can enhance their confidence in your handling of their financial well-being. Here is how to create a payroll system.
What Is Payroll?
Payroll involves managing employee payments, including their full names, salaries, compensation details, payment schedules, and payroll tax returns. All small businesses need payroll services to ensure timely salary distribution, manage tax filings, and organize financial records.
Is It Illegal to Use Fake Pay Stubs?
A fake paystub is a deceptive document that falsifies income details. While creating counterfeit pay stubs isn’t inherently illegal, using them for personal benefit can result in significant legal problems.
For example, providing fake paycheck stubs on a loan application is a criminal act with severe repercussions. Additionally, a landlord might pursue legal action against an individual who presents forged pay stubs as income verification to rent an apartment.
Understand State and Federal Employment Regulations
The payroll process starts with understanding the state and local laws applicable to small businesses. Before setting up payroll for your company, familiarize yourself with relevant U.S. laws. This includes federal and state regulations such as:
- Employment tax rates
- Minimum wage laws
- Family and Medical Leave Act
Check the U.S. Department of Labor site. It provides various resources to help you comprehend and comply with federal employment laws. Additionally, you should be aware of the payroll rules governing local businesses in your state.
Create a Payroll Policy
Once you establish a pay period for your business, develop a payroll policy or employee handbook. This handbook should clearly outline the guidelines for managing payroll, including the payroll schedule, employee benefits, and payment methods.
A payroll policy is crucial, as it helps business owners avoid various liabilities. Since payroll directly affects employees, they must be well-informed about the business’s payroll management process and any implications for their benefits. A comprehensive employee handbook facilitates effective payroll processing.
While a payroll policy is not a legal contract between the business and its employees, it shouldn’t be written as one. To ensure accuracy, have an employment law expert review the document before distributing it to your staff.
Obtain Your Employer Identification Number
As a small business, you already use a Social Security Number for tax filing. However, to process payrolls, you need an Employer Identification Number. Businesses can apply for an EIN. The EIN becomes your employer tax ID, which you will use for all business tax forms. Even if payroll setup is not immediate, an Employer ID Number is required for various transactions.
Depending on your state’s tax laws, you may also need to file state income taxes for your employees. In that case, you must apply for state withholding and unemployment tax accounts. Additionally, some local governments issue separate ID numbers for payroll tax filing, so verify if this applies to you.
Select a Payroll Administrator for Your Company
Managing payroll can be quite demanding. Many small business owners struggle to balance it with their daily responsibilities. You can delegate this task to a trusted in-house employee. Also outsource it to an accounting and bookkeeping service, or utilize payroll softwares.
Consider the advantages and disadvantages of each option before deciding. For example, an online payroll platform will automate tasks, freeing up your time. On the other hand, payroll service providers, while costly, can handle all processes with minimal input from the small business owner.
Organize Employee Documents
To finalize payroll setup, employers must gather specific details from new hires and update existing employee payroll information. This includes:
- A completed W-4 Form to determine the federal income tax deduction from the employee’s paycheck.
- A completed Form I-9 to verify the employee’s legal authorization to work in the U.S., requiring employees to provide formal identification, with employers retaining copies.
- Social Security verification to prevent name and SSN mismatches, utilizing the free Social Security Number Verification Service, which requires registration.
- Filing new hire paperwork with relevant authorities, as mandated by state laws.
Choose a Payroll Schedule
A payroll schedule indicates how frequently a business compensates its employees. Some small companies pay their staff weekly or bi-weekly. Others prefer semi-monthly or monthly disbursements.
Select a payroll schedule arbitrarily. First, review the relevant laws to see if there are specific regulations regarding payment frequency. Additionally, consider your business’s cash flow; if most of your revenue comes in at the end of the month, a monthly payroll schedule might be more suitable. Many state and federal income tax laws discourage late salary payments, so ensure you choose a pay period that you can consistently adhere to.
Endnote
Employing secure payroll software assists employers in preventing payroll fraud and simplifies the process of generating pay stubs for both themselves and their employees. A centralized system can significantly impact your organization’s financial well-being by tracking daily payroll data and auditing reports.