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How to Create a Payroll Management System for Your Small Business.

As the compliance rules and regulations keep changing, it is tough to manage the payroll management system. Particularly, startups and…

How to Create a Payroll Management System for Your Small Business

16th February 2021


As the compliance rules and regulations keep changing, it is tough to manage the payroll management system. Particularly, startups and small businesses hassle much on documenting and processing payroll.

Using the best payroll software can rule out many of such complications. However, you need to know how to operate payroll. Here is the clear roadmap to create a payroll management system for your small business.


Choose the apt payroll software

Firstly, choose the best payroll software that aligns with your payroll needs. How to choose the right payroll software?

  1. List down your non-negotiable needs.
  2. Look for the type of payroll system (according to your industry) you want.
  3. Check the pricing plan options in the market.
  4. Go for a FREE trial of some potential payroll.
  5. Select the best one.

This is a crucial step, and it will benefit you in the long run. Also, choosing a software solution for payroll can help you maintain an organized record of all the data.


Gather information for payroll

After, you select the best payroll software, including all the information your payroll system asks for.

Some of the information includes:

  1. Basic employee details like name, position.
  2. Social security numbers.
  3. Current contributions and deductions.
  4. Tax filing status.

Using these details, set up your payroll for:

  1. Create an employee ID number (EIN)
  2. Acquire a state tax ID number for all the locations your employee lives.
  3. Schedule the payroll process (monthly, weekly).
  4. Use a time track to calculate employee working hours.
  5. Open a business bank account for payroll reconciliation.
  6. Collect bank details of your employees.


Calculate the Gross Pay and Net Pay

Now, you have all the information to process payroll; you can begin calculating the paychecks. Gather timesheet data, including the overtime, check whether your payroll software integrates with time tracking software or does it already have one.

Now calculate the gross pay, excluding the tax deductions and health benefits. To get net pay, you need to subtract the payroll deductions from the gross pay.

The payroll deductions include:

  1. Pre-Tax deductions- health insurance, retirement plans, social security taxes.
  2. Tax Withholdings- Federal, local, and state income tax withholdings.
  3. Post-Tax deductions- Insurance plan contributions, 401(k) contributions, wage garnishment.


Include the Employer Payroll Taxes

Employers need to pay taxes based on employee compensation, including Federal Unemployment Tax (FUTA), State Unemployment Tax (SUTA), and other local taxes.

Ensure the payroll reconciliation (ensure your payroll software runs correctly) before you send the paycheck in your payroll software, like pay stub creator.

Even Though this might seem like an unnecessary process, sometimes errors occur in the software too.


Create a payroll entry system

The best payroll software integrates with the accounting software to facilitate payroll journal entries. This includes employee wages, payroll taxes, and payroll deductions. When you send out a paycheck, attach the paystubs no matter what mode of payment you use. This way, employees can cross-check for errors.


Document the compensation terms

After you have made payments, check for the tax payments every quarterly to ensure whether you pay state taxes on behalf of the employees living in another state. For this, your employees need a state tax ID, which you can get from the concerned state tax website. Mostly, you must make the first payment manually to facilitate automatic payment through software.


Generate the payroll documents

Once all this payroll is done, there is still one important step. Every year, you need to send the previous earning reports such as W2, W1, W4, and 1099 forms to employees and Internal Revenue Services (IRS).

This might not look very clear. However, all the payroll software has state tax filing requirements and forms to facilitate your business payroll deductions.

Also, it is well and good to consult an auditor for verifying the tax documents.


The Bottomline

We hope this roadmap helps you in creating a payroll management system for your small business effectively. Kindly let us know your experience.

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