If you run a small business, your employees need to get paid. Without financial compensation, they don’t work. And if they don’t work, your company is dead in the water.
Want to avoid that fate? Then setting up online payroll software should be your top priority when creating your business plan.
But managing payroll can be overwhelming and complicated, especially if you’re doing it for the first time. So, if you’re feeling nervous about it, don’t be. To help walk you through it, this guide will cover everything you need to know about small business payroll software.
How to Set Up Small Business Payroll Software
While it may seem simple on the surface, setting up a small business payroll involves several steps and boxes you must check in order to avoid costly penalties and fines. And in an uncertain time such as the coronavirus pandemic, you can’t take any risks that might further impact your business’s ability to operate. So, although you can handle payroll via software, you should still consult with your accountant and attorney to ensure that you're meeting all the right requirements and following your state labor laws.
Before we can begin explaining the how-tos, your first task is to select the right software for your business.
The Best Payroll Software for Small Businesses
There are a number of online payroll softwares to choose from. For the sake of simplicity, we’ve selected 3 best-ofs based on certain features:
- Top choice – Gusto – Gusto is a fantastic, intuitive, full-service payroll solution that gets top marks across the board. The Core Plan, which is the base model, starts at $39/month with an additional $6/month for each managed employee.
- Automatic local, state, and federal payroll tax filing
- Integrates with accounting software
- Employee self-onboarding
- Unlimited payroll runs in every state
- Universal acclaim
- Support is limited to the standard work week and hours
- Expensive for small businesses with more than 10 employees
- Most widely used – QuickBooks Online Payroll (QBOP) – With basic plans starting at $35/month, QBOP is the most popular software solution on the market. It’s regularly used for invoices, general accounting, and inventory management.
- Integrates with legacy QuickBooks software
- Handles in-house bookkeeping
- Employee self-service portal
- Quickbook Team assists with setup and tax filings
- Expensive if you have 10 or fewer employees
- Can be complicated to use and has a fairly steep learning curve
- Best customer service – SurePayroll – SurePayroll is known throughout the industry for offering best-in-class customer service. With full-service plans starting at $29.99/month, it’s not only cheap, but powerful.
- Customer service available 6 days of the week
- Fast and easy online enrollment
- Boasts a tax accuracy guarantee
- Extra fees such as year-end company filings or monthly integration fees
- No free trial option
Before you can run your payroll, there is prep work that first needs doing. Fortunately, once you gather all of the relevant information, the process will be streamlined moving forward.
Make Payroll Decisions
There are several decisions you must make such as:
- Are employees exempt or nonexempt? – The US requires that most employees be paid at least a federal minimum wage as well as overtime of at least 1.5x for all hours worked above 40 hours in a standard workweek. But according to the US Department of Labor, there are exemptions to this:
Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees.
To qualify for exemption an employee must:
- Be paid a salary of at least $684/week ($35,000+ annually)
- Have job duties that involve managing the business, a department, or subdivision; regularly direct the work of at least 2 full-time employees; and have hiring, firing, or promotional authority
Due to COVID-19, some of these exemptions may look different under the Fair Labor Standards Act (FLSA). For example, if exempt employees are directed to take leave without pay in a pandemic, the following conditions apply:
Exempt, salaried employees generally must receive their full salary in any week in which they perform any work, subject to certain very limited exceptions. The FLSA does not require employer-provided vacation time. Where an employer offers a bona fide benefits plan or vacation time to its employees, there is no prohibition on an employer requiring that such accrued leave or vacation time be taken on a specific day(s). Further, this will not affect the employee’s salary basis of payment so long as the employee still receives in payment an amount equal to the employee’s guaranteed salary. Exempt salaried employees are not required to be paid their salary in weeks in which they perform no work.
- Employee wages – How will you be paying your employees? Will they be on salary or be hourly? If an employee is exempt, they must be paid a salary. If they’re non-exempt you can decide whether or not they’re paid on an hourly or salary basis.
- Payment method – How do employees receive payment?
- Will they be paid by printed check, direct deposit, or payroll card?
- Will they be paid weekly, monthly, or semimonthly?
Once you’ve answered these questions, it’s time to gather all the necessary information.
Gather Payroll Information
To hire an employee, you must ensure that they fill out the first two sections of an I-9 Form as well as the entirety of a W-4 Form, which will include information that will help determine the federal income tax withholding you’re required to take out. Relevant payroll information you’ll also need includes:
- Your Employer Identification Number (EIN)
- State tax accounts
- Your state’s new hire reporting account
- Workers' compensation coverage
- Electronic Federal Tax Payment System account to pay Federal taxes
Once this is completed, you’ll want to take the time to thoroughly review both the U.S. Department of Labor website as well as your state’s Department of Labor site, so that you aren’t caught unaware by any conditions or provisions. From there, you’ll have to write your employee handbook. Inc.com has this to say about employee handbooks:
Experts say that small and mid-sized businesses can craft employee manuals that both protect them from litigation and put staff members at ease by spelling out in positive terms the company's policies. In order to have an effective policy manual, the employer should take the time to identify what is important to the business, both in keeping the employees informed and happy, as well as accomplishing the business objectives of the company.
It’s important to keep in mind that in light of the current pandemic, you may face special conditions in your hiring process. This could pertain to whether you are an essential business or not, or if the pandemic will require you to hire more help than you had before. Be sure to take note of the potential conditions for your business and how they may affect your hiring process.
If the current situation is threatening your business or your employees, become informed about the potential tax relief programs available through the CARES Act that can assist you through these tough times.
Run the Payroll Software
After you’ve dotted your I’s and crossed your T’s, it’s time to actually get the system running. Naturally, your steps may vary depending upon your payroll services and software. However, there are some basic steps that will be universal, including:
Determine the Numbers
To get started with payroll, you’ll need to account for several financial figures, such as:
- Add up employee time worked – This matters more for hourly workers than salaried since hourly workers will vary. You will then need to add overtime, holiday pay, vacation days, and paid sick leave (if applicable). Once you multiply these numbers by the wage rate, you’ll have your gross pay.
- Figure federal and state taxes – Taxes will be determined by the info on your employee’s W-4 form. And, as Business.org mentions, you’ll need to deduct common withholdings such as:
- "FICA taxes, or Medicare and Social Security taxes (also known as payroll taxes or employment taxes)
- Court-ordered wage garnishments for child or spousal support
- Premiums for your company’s medical, dental, and vision plans
- Voluntary donations to charitable organizations
- Retirement fund contributions"
Fortunately, most payroll solution softwares will automatically calculate employees’ wages and withholdings. That said, it’s also worth mentioning that there may be some potential tax reliefs and refunds due to the coronavirus and the recently passed CARES Act.
Whether you handle payroll manually or via software, it’s important that you double-check your work to ensure that there aren’t any accounting errors. Your math could be off or you could easily input the wrong numbers. An easy way to check for this is by comparing net pay and withholdings to previous paychecks.
After you’ve confirmed that the pay figures are accurate, it’s time to pay your employees. To do so, you’ll need to offer your employees at least two of the four payment options, including:
- Direct deposit
- Payroll cards
Due to the coronavirus, some businesses have been encouraged by the World Health Organization to start thinking about contactless payments. They recommend that businesses stop accepting cash payments, and look for ways to transfer over to digital payments from customers.
You’re required to withhold and contribute to employment payroll taxes. According to the Balance:
Employers are required to deposit federal income tax and social security and Medicare taxes, monthly or semi-weekly based on the schedule they choose before the beginning of the tax year. FUTA tax deposits are due for the quarter of the year that tax due exceeds $500. The Internal Revenue Service provides an Income Tax Withholding Assistant to help you determine how much tax you need to withhold and report as an employer.
On top of that you may be expected to pay additional payroll taxes for your state’s:
- Workers’ compensation fund
- Disability fund
- Unemployment tax fund
Payroll Made Simple as 1-2-3
Setting up payroll management software for your small business may seem daunting, but it’s fairly straightforward. When it comes down to it, there are three primary steps:
- Select the proper payroll software
- Gather all of the relevant payroll information
- Utilize the software for payroll
Once accomplished, you’ll be free to focus on growing your business.
Confirm Your Payroll With an Accountant or Lawyer
If this is your first time setting up your payroll, it can be reassuring to talk to a professional who deals with payroll and payroll management software for a living.
But how do you find the right person for payroll services?
Enter Nextdoor. This neighborhood hub is the solution that small businesses rely upon to help them connect with locals in their area. With it, you can find payroll accountants and lawyers by trade who will be happy to set up consultations.
While you’re there, you may want to set up your own Business Page so neighbors can exchange recommendations and reviews about your local business. Nextdoor is the new, better way to connect with the people near you – whether that be for payroll help or for becoming a pillar in your community.
If you are a local business, claim your free Business Page to get started on Nextdoor. Resources on how to use Nextdoor to stay connected with your local customers during coronavirus, pertinent news affecting businesses, and more, are available in our Small Business Guide for Coronavirus Relief.