Starting a new payroll system can be scary, especially if you’re running payroll for the first time or if you used a different payroll method before. While there are some things you’ll have to adjust to, payroll software doesn’t have to stress you out.
What to know about payroll software
Starting payroll software shouldn’t be difficult, especially if you know what to expect. Here’s everything you need to know about payroll software before you get started.
1. Choose the software
The payroll software you use must meet your business’s needs. If it doesn’t, it’ll never be a good fit for you and you’ll likely be unsatisfied with the software.
Not all payroll software is alike. Each software package has different features and pricing.
Small businesses should pick payroll software for small business. Big payroll packages designed for big businesses won’t necessarily work well for your business. And, small business payroll software is often more affordable.
2. Register your business
New businesses need to make sure their business is registered with their state. Every state has different requirements for registering a business, so make sure you check with your state agencies.
When you set up your payroll software account, you need to know your business’s legal name, DBA, and address.
3. Gather your business identification numbers
To run payroll, you need your business identification numbers. These numbers are typically used for employment tax remittance and filing.
You need to have an Employer Identification Number (EIN). You can apply for an EIN online.
You will use your EIN to report federal taxes to the IRS. You might also use your EIN on other IRS documents and with state agencies.
You most likely will need separate state or local identification numbers to report state and local taxes. Research payroll information for employers in your state to find out if you need an identification number and what you must do to obtain it.
4. Collect employee information
You need several pieces of personal employee information to run payroll. You need each employee’s:
- Full legal name
- Social Security number
You should ask the employee for this information when they begin working at your business. As employees move, get married, or have another change in family status, this information may change. The employee should notify you of any changes, and you should update the information in your records and the software.
5. Determine deductions
Deductions will be different for every employee. Deductions depend on what employee benefits you offer your employees and how much employees choose to contribute to each benefit. Some employees might even have wage garnishments for unpaid debts, which you are required to withhold.
Deductions might be a fixed dollar amount or a percentage of the wages. You must know how much to deduct from each employee’s wages and what the deductions are for.
You have to withhold some deductions before taxes and some after taxes. You must understand pre-tax vs. post-tax deductions to subtract them properly.
6. Calculate tax rates
Your payroll software will likely already know some of your employment tax rates. For example, every business is subject to the same rates for Social Security and Medicare taxes (FICA tax). The software also probably knows your federal unemployment tax (FUTA tax) rate, which is the same for most employers unless you’re in a credit reduction state.
You will need to tell the software how much to withhold for other taxes, including income taxes and state unemployment tax (SUTA tax).
7. Decide how to handle taxes
You can remit and file employment taxes yourself. But, you can also have the software provider handle the taxes for you.
If the software company will handle the payroll taxes for you, you need to give them your tax information. The company needs to know your depositing schedule for federal income and FICA taxes. The company needs your tax filing identification numbers. You also need to authorize the company to handle taxes for you by filling out Form 8655.
8. Pick a pay period
You must make decisions about how you will pay employees. You need to choose a pay period, also called a pay frequency. This is how often you will pay your employees.
Common pay frequencies include weekly, biweekly, semimonthly, and monthly. If you already have employees, you will likely keep the same pay period. If you’re a new employer, you need to choose your frequency.
9. Consider compensation
If you’re just changing the way you run payroll, you will likely continue paying your employees the same amount as before. New employers need to make many decisions when it comes to compensation.
You must decide whether to pay your employees a salary vs. hourly wages. And, of course, you need to know the rate you will pay your employees.
You need to know the difference between exempt and nonexempt employees. You must pay overtime wages to nonexempt employees, even if you pay them a salary.
You also must decide if you will give other types of compensation to your employees. For example, you might give employees tips or commissions.
10. Pick a payment method
There are many ways you can pay employees. Types of payment you can consider include check, direct deposit, payroll cards, and cash. Choose your method.
Depending on what you choose, you might need to set it up in the software. For example, if you pay employees by direct deposit, you need to enter your business’s bank account information, along with the information for each employee.
11. Collect previous records
If you are switching the way you run payroll, you will have previous payroll history. You might have to enter the records of your previous payrolls into the software. Adding your payroll history lets the software accurately calculate taxes and deductions.
12. Make a recordkeeping system
You have to keep employee payroll records. Your payroll software might keep those records for you, so you don’t have to worry about paper copies.
You can also use human resources software to organize and store your employee information in one place. You can upload documents into an employee’s file, so all the documents are kept in one place.
13. Choose a start date
Pick a date when you want to start running payroll with the software. You need to begin setting up the software before the date you want to run payroll. Entering all the information can take some time. You might also need extra time for the software company to verify your account. Don’t expect to run payroll the same day you purchase the software.
If you want the software company to handle taxes for you, you must select a tax takeover date. This is the date you want the company to start managing taxes for you.
14. Grant employee access
You should decide whether you want employees to have access to their payroll information. When you use employee self-service software with your payroll software, employees can view their pay stubs, personal information, and other payroll information. You can even have employees track their time and attendance, which means one less thing for you to do.
Setting up and running payroll
After you’ve made all your decisions and gathered all the necessary information, it’s time to set up your payroll software. Add all the information for your business and your employees. After everything is in the system, it’s time to run payroll.
When you’re ready to use payroll software, try Patriot Software’s online payroll software. It’s affordable, easy to use, and designed specifically for small businesses. You can start a free trial today!