As you scale your startup, you'll eventually need to hire workers to help you operate your venture.
But before you start hiring, you'll need to set up your payroll system. This will ensure that you're paying your employees the right amount each time, withholding and paying the appropriate employment taxes, and complying with federal and state guidelines.
So, if you need to set up payroll for the first time, here's what you should know:
- Four things to do before setting up payroll for the first time
- How to set up payroll for a startup
- Follow these two best practices for accurate and efficient payroll runs
- File your state payroll taxes on time every time with Warp
Four things to do before setting up payroll for the first time
Before you can hire employees and run payroll, there are a few steps you'll need to take first. Once the following four tasks are complete, you can start setting up your payroll system.
Get an EIN
All businesses must register with the Internal Revenue Service (IRS) for an Employer Identification Number (or EIN, for short) before hiring employees. This tax identification number allows federal, state, and local governments to identify your startup on all its business tax filings.
If your business is located in the United States, you can apply for an EIN in minutes. Just visit the IRS website and complete the form. If you reside outside the US, you may need to apply for one by phone instead. More information on applying for an EIN using this method can also be found on the IRS website.
Register as an employer in your state
Next, you'll need to register as an employer in the state you do business in. If you plan on hiring employees in other states, you will need to register as an employer there as well. This will allow you to pay any required income and employment taxes in each of those states.
However, note that some states require out-of-state businesses to first register with the Secretary of State office in a process known as foreign qualification. This process allows you to legally conduct business and hire employees in those states.
Registering as an employer involves applying for an income tax withholding and unemployment account with the relevant agency in each state. You'll then receive an additional tax identification or account number to use when filing those taxes.
For more information on how to register for any state tax ID numbers you need, contact the appropriate agency in each state. Warp also handles state tax registration in all 50 states, automatically registering your startup with the proper agencies when you need it.
Create an employee handbook
If you don't have one already, now is the time to create an employee handbook for your startup. This document outlines the policies, procedures, and guidelines that your employees must follow and the legal rights your workers are entitled to. Additionally, an employee handbook helps communicate your expectations for your employees and answers any questions they might have about how your organization operates.
An employee handbook (often referred to as an employee manual as well) should include information about company policies such as employee benefits, overtime, paid time off, discipline, and termination. If your employees must follow a particular process to get set up in your payroll system, include these instructions in the document too.
Keep your employee handbook in a place that's accessible to all your employees so they can review it whenever they have any questions. Make sure to give a copy to each new hire during the onboarding process as well.
If you're feeling unsure about creating your own employee manual, use Google to find a template you like and tweak it to fit your startup's needs.
Classify your workers correctly
As an employer, one of your responsibilities will be to make sure that you've accurately classified your workers as employees or independent contractors. This ensures you can withhold the appropriate taxes and pay for any required employee benefits.
If you don't classify your workers correctly --- and withhold the correct amount of taxes on their behalf --- you may be responsible for paying the taxes you owe and any penalty fees assessed by the IRS or your state's tax authorities.
You can learn more about the factors that determine how the IRS classifies workers on the IRS website. If you're still unsure whether you should classify a worker as an employee or independent contractor, the IRS offers a tax form you can file (Form SS-8) to determine their classification.
How to set up payroll for a startup
Choose your payroll frequency and schedule
Companies aren't allowed to pay their employees whenever it's most convenient for them --- they must choose a specific cadence and stick to it. The cadence you choose determines the length of your pay periods and how often you'll need to pay your employees.
Generally, you can pay employees weekly, biweekly, semimonthly, or monthly. Payday typically lands a few days after the end of each pay period, allowing employers to calculate the hours worked and withholding amounts for each employee.
To help you choose the best payroll frequency for your startup, here are some questions to think about:
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What are your state's requirements? Most states have requirements about how often you run payroll, so check with the state your business is in and in each state your employees reside in.
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When is the best time for your business to run payroll? Review your startup's cash flow to determine any trends you should take into account. You may find that your startup has a surplus of funds at a particular time each month or that it's easier for you to run payroll biweekly instead of weekly.
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When is best for your employees? You should also take into account the financial needs of your employees. For example, even though longer pay periods may reduce the amount of work you need to do, paying employees less frequently can make it harder for them to pay their bills. Get their feedback and try your best to implement it when choosing a payroll schedule.
Decide how you'll pay your employees
Most companies today use direct deposit to pay their employees. Not only does it save time and effort on your end, it also makes things easier for employees since they don't have to go to their bank to deposit a paper check.
If you go this route, ask employees to complete a direct deposit authorization form. This enables you to get their permission and banking details in writing.
Companies can also pay employees via check, payroll card, or cash, but these methods are quickly falling out of favor with employers and employees due to the extra work involved. Do what you can to take your employees' needs into account when choosing your startup's payroll payment method.
Choose your payroll system
The actual payroll process can get complicated, especially if you have employees in multiple states. Miscalculating payroll and payroll taxes can also result in fines and other penalties levied on your startup, so it's crucial to get this process right.
Choosing the best payroll system for your startup's needs can help streamline this process and reduce the chances of mistakes happening.
There are three main ways to run payroll: manually, via payroll software like Warp, or by outsourcing this work to an accountant (or other payroll service provider). Down the line, you may hire an in-house accountant to manage your payroll operations and other financial needs.
Although running payroll manually is the most cost-effective option out of the three, there are more chances of mistakes with this method. For instance, one wrong input in your Excel sheet can affect all your calculations for that payroll run. Because of this, many startups use payroll software to help them process payroll or hire an accountant.
As you determine the best solution for your needs, consider each option's benefits, drawbacks, and cost. Read reviews on different software options and providers. Ask other founders in your network about their experiences and recommendations for various payroll solutions.
Once you choose your payroll system, communicate the details of your payroll system to your employees. This includes when and how often they'll be paid, the payment method you'll use, any deductions you'll make, and other essential details to keep in mind about your startup's payroll process. Add this information to your employee handbook, too.
Have employees and independent contractors fill out the required paperwork
When onboarding new hires to your startup, you must ask them to complete Form I-9 and Form W-4 and return them to you by their first day of employment. Form I-9 helps you determine whether your new employee is eligible to work in the US, while Form W-4 determines how much to withhold in taxes from each paycheck.
Additionally, many states will have their own income withholding form for employees to fill out, so check with the appropriate state agencies to ensure you have everything you need to fulfill this employment requirement.
If you have hired independent contractors, you'll need them to complete Form W-9 instead. This form doesn't have a specific deadline, but you'll need the information on it to send them a Form 1099-NEC each January. So, it may be easier to request it during onboarding so you don't encounter any delays during tax season.
Run your first payroll
Now it's time for your first payroll run. Since this is your first time going through the payroll process, give yourself some extra time to go through the process and thoroughly review the numbers for each employee.
Input each employee's information --- including their full name, address, Social Security number, compensation details, and withholding information --- into your chosen payroll system. Calculate the number of hours worked (including overtime hours and paid time off) for each employee during the pay period, then use this information to determine their wages for the pay period.
Then do the same for their payroll taxes. Determine how much to withhold for each employee based on their withholding allowances and the appropriate state's employment laws.
If you use payroll software, the platform will automatically calculate all of these numbers for you. If you're doing this manually, the IRS offers a tax withholding estimator tool that employers can use to determine how much to withhold from each employee's wages.
Once you've finished with your calculations, make sure to check that the numbers are correct (yes, even if your software or provider has run the numbers for you). Also ensure that all withholdings have been deducted from each employee's wages before you approve payroll for processing.
Follow these two best practices for accurate and efficient payroll runs
Process payroll on time
Think back to the last time an incoming payment didn't arrive when you expected it to. How did that impact your business operations?
Just as late payments can derail your startup, late paychecks affect your employees' ability to manage their responsibilities. Additionally, late paychecks hurt employee morale --- and payments that are regularly late can force them to seek work elsewhere.
So, make timely payroll runs a priority. Give yourself enough time (at least two to three days) to review payroll and check that the numbers add up. Keep in mind that direct deposit takes an extra few days to process, so if you pay employees using this method, make sure to factor that into your process.
Secure and maintain your payroll records
For multiple reasons, you'll need a place to store all your employment and payroll tax records for your business.
Employees will give you sensitive personal information, including their Social Security number and banking details, to verify their identity and pay them via direct deposit. As a result, you'll need a safe and secure place to store this information --- a place where unauthorized people can't easily access it.
Additionally, the United States government requires all employers to keep employment records, timesheets, pay stubs, copies of your filed tax forms, and records of your tax payments on file for several years in case of an audit. The Equal Employment Opportunity Commission (EEOC) requires employers to keep employment and tax records on file for three years, while the IRS requires them to hold onto employee wage records for at least four years. So, you'll need a place to organize and keep this information so you can easily access it if you need to.
Some states have additional requirements for employers to comply with --- check with every state where you employ workers for more information.
File your state payroll taxes on time every time with Warp
Another responsibility you'll have as an employer is filing and paying your payroll taxes on time. This includes federal and state unemployment taxes, Medicare, and Social Security taxes.
Federal, state, and local payroll tax deposits are typically made every month, but you should check with the appropriate authorities to ensure you're following the correct schedule. And that's not all --- certain tax deposits and filings may also be due at other times of the year.
Because failing to file payroll and other employment taxes on time can result in steep penalties, it's crucial to stay on top of these responsibilities. Payroll software like Warp helps you process payroll and file payroll taxes accurately every time, making it an excellent option for early-stage startup founders with limited bandwidth. Our platform also offers hands-off tax compliance for added peace of mind --- we'll automatically register your startup for any payroll tax accounts you need in any state, monitor them for issues, and proactively resolve them without you lifting a finger.
To learn how Warp can save you time and effort on payroll, request a demo today.
