Small Business Payroll: Set Up & Process Payroll

When starting a new business, one primary step towards growth is acquiring employees and establishing business stability. To do this, you’ll want to get small business payroll in order by obtaining an EIN, registering for tax withholding, establishing a bank account, and choosing a system.

Getting a payroll system in place is key to maintaining trust with your employees and keeping your finances in order. Let’s take a closer look at setting up the payroll for your pet care business.

How to set up small business payroll in 5 steps. 

Getting payroll services set up involves a few steps in the first instance to get things going. However, once you’ve gone through these steps, you’ll be able to automate a lot of your payroll and there will be much less work involved. 

1. Obtain an Employer Identification Number (EIN).

Obtaining an Employer Identification Number (EIN) is the first step to establishing yourself as a business with the IRS. Without one, you can’t legally have employees or withhold taxes on your small business payroll.

An EIN is also known as a federal tax identification number and, as the name suggests, is used to signify that you are a business entity rather than an individual. You can apply for an EIN online on the IRS’ website, or by mail or fax. Businesses established outside of the US can also apply over the phone.

Even if you do not have employees, you still must have an EIN, as this is what the IRS will use to identify you. 

2. Register for tax withholding.

When you hire employees, you’re required to withhold some of their income tax which you will then pay to the IRS on their behalf. Registering for an EIN allows you to do this for federal taxes and this step ensures your business is compliant with federal, state, and local tax laws. 

Just as you need an EIN for federal taxes, most states require businesses to register for a state tax identification number as well. This allows you to withhold state income taxes as well as payroll-related taxes (such as disability insurance, unemployment insurance, etc.). 

3. Calculate payroll taxes.

When employees start working for small businesses, they’re required to fill out a W-4 form. This will allow you to calculate the taxes that need to be withheld from their wages on your small business payroll.

The IRS provides tax tables and a tax withholding estimator that you can use to calculate the correct amount of federal income tax to withhold. These tables take into account the employee’s taxable income, filing status, and the frequency of payroll (weekly, biweekly, etc.).

You’ll also need to file quarterly reports using Form 941 to summarize the taxes you’ve withheld and deposited. 

States all have different tax rates, so you’ll need to research the state where your business and employees are located to decide exactly what should be withheld on paychecks. Some states, like Texas, have no income tax. 

Lastly, you also need to consider the specific city you’re in. In some areas, local governments impose income taxes. For example, New York City has its own local income tax, which you have to withhold from employees working within the city limits.

4. Establish a payroll bank account.

While it’s not legally required for you to have a separate small business payroll bank account, it’s highly advisable so you can keep on top of funds and make sure enough money is allocated to pay your employees before processing payroll. You can then transfer the total payroll amount into the account before payday so everyone is paid smoothly.

There are penalties for not paying employees on time (depending on the state), so this can also help ensure you don’t invoke any penalties for being late. Your payroll process should be seamless, and a separate bank account is one way to ensure this happens. 

This also protects you from fraud. Having a separate bank account that limited people have access to reduces the risk of theft and cybercrime, which can run rampant in small businesses. 

5. Choose a payroll system.

While it’s possible to process payroll manually, it’s usually not a good idea. Processing small business payroll manually means more room for error and more time taken up, with potentially the need to hire another staff member to do this.

Small business payroll software allows you to automate tasks, including the ability to file payroll taxes and paycheck creation so you don’t need to worry about the numbers—the payroll software does it for you.

When looking for small business payroll software, make sure the payroll service has all of these features available and work with direct deposit to ensure the smoothest and most up-to-date processing. You can also consider outsourcing your small business payroll to a third-party payroll provider who may have more efficient payroll software if you don’t have the bandwidth (but with good payroll software, this usually isn’t necessary).

Once you’ve chosen your small business payroll software, you’ll want to set it up with all of your company and employees’ information. It’s also important to test the payroll software before running payroll for the first time.

How to process payroll for new employees.

When you have your small business payroll software set up and you’re ready to go, here’s how to onboard new employees. Making sure you pay employees on time is crucial to trust and avoiding penalties. 

Request employee tax forms.

The first thing you should do is request employee tax forms. These inform you of what taxes you should be withholding so there aren’t any surprises down the line when it comes to tax filings. If the wrong taxes are then withheld based on errors on the tax forms, that’s up to the employee to correct, not you.

Make sure you also check for specific state and local regulations before onboarding someone onto your small business payroll software so everything is covered. 

Typically, tax forms requested may include:

• W-4 (Employee’s Withholding Certificate): This form tells you how much federal income tax to withhold from the employee’s paycheck. The employee provides information about their filing status, dependents, and any additional amounts they want withheld.
• State Withholding Form: Depending on the state, you may need to also request that they fill out a withholding form specific to where they live. 
• Form I-9 (Employment Eligibility Verification): This form verifies the employee’s identity and right to work in the United States. They will also have to provide identification such as a passport, driver’s license, etc. The documents required depend on if they’re a citizen, a permanent resident, or a non-resident alien.
• Direct Deposit Authorization: While not a tax form, you should also get authorization to deposit the employee’s wages into their bank account.

In return, you will also have to provide a W-2 to the employee at the end of each year which summarizes the employee’s annual wages and taxes withheld. 

Establish a payroll schedule.

You’ll also want to establish a payroll schedule. In the US, small business payroll software usually offers three main options based on the payroll provider: 

• Biweekly: where you pay employees every two weeks.
• Semi-monthly: where you pay employees twice a month (e.g, the 1st and the 15th). 
• Monthly: where you process payroll on the same day once a month. 

Once you’ve agreed on the pay period for your small business payroll, you should make sure employees are aware of this. Some companies also give their employees the choice of what works best for them, but this will depend on the payroll software you have set up as it may not be equipped for that. 

Sign employee compensation agreement.

You should always have signed documents between you and the employee about the terms of your small business payroll, including information such as: 

• Employee name and title
• Effective date (start date) and end date, if applicable, or the terms of breaking the contract (notice periods for resignation and termination)
• How much compensation they will receive (either annually or hourly)
• When the small business payroll will run
• The payment method (usually, but not always, direct deposit)
• Any overtime structure on the small business payroll
• Any bonuses they have the potential to receive
• Notice about deductions and withholdings 

An employee compensation agreement is a comprehensive document that ensures both the employer and employee are clear on the compensation terms and conditions. By having this in place, you’re both set up for success. 

Fund the payroll bank account.

Lastly, you’ll want to make sure you fund the small business payroll bank account. There are penalties for being late in paying employees that, in some states, can kick in heavily as soon as you’re a day late. 

If you’re in the financial position to be able to do so, it’s also a good idea to have a buffer in the account to cover any unexpected discrepancies. You should, however, avoid overfunding as it can tie up money in the payroll account that could be better used elsewhere in the business. Generally, 10-15% of a buffer is a good idea, but no more.

You can also set up automatic transfers from the main operating account so you don’t have to actually remember to transfer funds every time payroll is about to run. 

Ensure your small business payroll software is connected to the right account and everything is good to go before you run your first payroll to avoid any of these mistakes. Most payroll software will allow you to run a small test that won’t take long or require significant funds. 

Payroll FAQs. 

Here are some other frequently asked questions about small business payroll, payroll software, and payroll taxes. 

Do you need an accountant to establish payroll?

Legally, no, you do not have to use an accountant to establish payroll and can run payroll yourself. However, it’s generally not advisable. Small business payroll can be complex and lots of things can go wrong, especially when it comes to taxes.

Hiring an accountant will ensure your small business payroll process goes smoothly and all tax obligations are fulfilled, avoiding any unwanted attention from the IRS. 

Do you need accounting software to process payroll?

There are multiple options for processing small business payroll, but having software that integrates with payroll is the easiest option. Not only will the payroll software run smoothly so you don’t have to spend much time on payroll when it processes, but it will consider all payroll taxes and do payroll reports for you so you can stay on top of everything.

It is possible to do your payroll manually, but this can also be problematic if the IRS is ever looking for records and receipts. Having it all on your payroll software makes things easier, as it’s easy to pull this information should it ever be asked for. 

How do you calculate payroll taxes?

The IRS tries to make calculating payroll taxes as easy as possible by having a calculator on their site. Even then, however, payroll taxes can be complicated.

This is another advantage of having payroll software to do everything for you. The software will calculate the payroll taxes, which can then be double-checked by a professional accountant who knows the tax laws well. 

PetExec integrates with Quickbooks payroll for automated online payroll.

If you’re starting up your pet business, finding good software can be one of the hardest parts. That’s why we’ve created our cloud-based software to help small businesses thrive.

Not only does PetExec integrate with Quickbooks for automated online payroll and calculating payroll taxes, but it has other features to help with your pet business such as customer service, technological integrations like cameras, and more. It’s a one-stop shop for all of your automated pet business needs and will take the stress out of payroll taxes and keeping on top of client bookings.

If you’re in search of the perfect payroll software to partner with, check out our free demo or contact us with any questions!