The quick guide to setting up payroll the first time

As a new business owner, you need to focus on what’s most important for getting your company off the ground — whether that’s hiring your first employee, creating a marketing strategy, or finally sitting down to eat lunch.   But if you’re in the process of hiring employees, then setting up payroll is something that should rise to the top of your list. And, if you are indeed ready to set up payroll, there are a few steps every business needs to take to make sure they’re ready to pay employees, get aligned with the taxman, and stay compliant with state and federal employment laws.

Don’t worry, it’s a fairly painless process!

Here are the simple steps for making sure your company — and your payroll — are set up right.

5. Establish a pay schedule

Payday is often celebrated, but what day will it be for your employees? Will you have one pay schedule for everyone, or multiple ones for different types of employees (like salaried vs. hourly)? Keep in mind that each state has requirements on how often employees must be paid. The most common pay schedules are as follows:

• Weekly: Employees are paid the same day each week and there are typically 52 paydays a year.
• Bi-Weekly: One of the more popular schedules, employees are paid the same day every other week (like every other Friday). This approach results in 26 paydays per year.
• Semi-Monthly: With this schedule, employees are paid on the same two days every month, netting them 24 paydays a year. Common pay dates would be the 1st and 15th or the 5th and 20th of each month.
• Monthly: Typically reserved for higher earners or salaried employees who don’t necessarily need more frequent checks, monthly is paid on the same date each month. With 12 months in a year, your monthly employee would take home 12 checks.

Got questions or want to know the pros and cons? Check out our guide to choosing a pay schedule.

6. Figure out how to pay employees

Don’t wait until that first payday to decide how your employees will receive their hard-earned money. As an employer, you have flexibility in how you set up employee payments, but these are the most common options:

• Check: A tried and true old school method for processing payroll, you can handwrite paychecks or use a payroll service provider to self-print or order printed checks. Consider, however, the potential for an employee to lose their check, delays in the employee depositing the check, and the time spent on preparing the checks themselves. If you do consider an outside provider, here’s a big list of payroll services you might look for.
• Direct Deposit: One of the more popular methods (if not the most popular way to pay), using direct deposit for payroll offers many benefits. Employees can skip the hassle of depositing a check, they can be paid remotely, and you save time in the process. If you use a payroll provider, ask them how direct deposit can you save time and money. Learn more about how to set direct deposit up for employees, too.
• Paycards: For employees who don’t have bank accounts, prepaid debit cards provide a convenient alternative to direct deposit. Employees can use the cards immediately and employers can virtually load the card’s balance each paycheck. Keep in mind, however, the possibility of lost or stolen cards and any associated fees for setting up the card or ATM transactions.
• Cash: In an increasingly paperless world, cash paydays are falling in popularity. While it is technically an acceptable way to pay your employees, you’ll need to take extra care that you keep a paper trail that documents payments and associated taxes for cash payments. Out of all four methods listed, this is the one we’d be least likely to recommend.

Add compliant decor with a labor law poster

Federal and state employment law requires employers to post a state-specific labor law poster in an employee-accessible common area.   Posters are industry-specific, and they must be up-to-date (1985 was a probably a rockin’ year but poster-wise it isn’t compliant anymore) and can easily be ordered online.

Think about benefits

If economically feasible for your business, offering employee benefits like health insurance or retirement options can go a long way toward attracting and keeping great workers. As a business owner, you’ll get to take advantage of them, too. Here are some common benefits to consider:

Health, Vision, Dental, Life, and Disability Insurance: Small employers (those with less than 50 full-time equivalent employees) don’t have to provide health insurance coverage to their employees. However, health insurance is an attractive benefit to offer potential employees to keep them (and their families) healthy and happy. Some health, dental, and vision insurance programs can also qualify as a pre-tax deduction, which reduces the taxable wages for both the employee and you as the employer. If you are working with a payroll provider, see if they have a licensed insurance agent on staff to walk you through your options.

Retirement Benefits: Only half of American workers have any retirement savings at all (yikes!). Peace of mind and security for the future can weigh heavily for your employees, so help them ease this burden by looking into offering one of several available retirement options (401(k), Roth 401(k), Simple IRA, among others):

• A 401(k) plan is a pre-tax retirement plan that allows employees to set aside a portion of their pay for investing. When they retire and withdraw these funds, they are then taxed at that time. As an employer, you can match an employee’s contributions to their plan and even qualify for a $1500 tax credit to help offset the cost of offering a plan.
• Similarly, a Roth 401(k) allows the employee to set aside a portion of their pay for investment. However, this is a deferral from their post-tax wages. If an employee anticipates that they will be in a higher tax bracket at the time of retirement, this may be the better option for them.
• A Simple IRA (Savings Incentive Match Plan for Employees) can be an attractive option for employers because, typically, these plans do not have the same start-up costs as other traditional retirement plans. These plans are available exclusively to small businesses that offer no other retirement plans and are set up as a pre-tax deferral.
• Lastly, keep in mind some states require employers to provide their employees access to a retirement savings plan. Learn which states have this mandate in our guide to state sponsored retirement plans.

Understanding which retirement plans you should (or can legally) offer as a small business owner can be overwhelming, to say the least. To be able to focus your attention on other operational matters, consult with your CPA, financial advisor, or a retirement plan provider for more information.

Vacation and/or PTO policies

Consider if you’ll offer employees PTO, and what type of sick and vacation policies you want to set up. Some employers let their team accrue time off based on hours worked, the number of pay periods that go by, or even in one lump sum at the beginning of the year. Also, consider state requirements. Some states require a minimum amount of sick time, and some states also have requirements about how unused PTO is paid out upon an employee’s termination.