Building a payroll management system can seem daunting, but at it’s core, there are a few components that make up the process. In the simplest terms, you want to get all your employees information, track their time and how much they get paid for that time, make sure you follow tax and labor rules, and then pay them in line with those pieces. But getting to that point is where many have trouble.
Before you start: Make sure you have an Employee Identification number (EIN)
This is the unique identifier that the IRS will use for your business. It’s a code you use to report on taxes, establish your location, operation, and information about your business. You can Get your EIN through the IRS here.
Step 1: Establish your Employee Information
The first thing you want to do is gather the information about your employees. To effectively do this, all employees need to fill out a Federal W4 form, and if necessary a State W4 form (you can download them here). The W-4 is designed to have the employee outline their deductions, filing status, and any dependents. Essentially, this is how you are going to establish the initial input into payroll calculations. This will ultimately change over time, but this is essential for employers. Every new employee needs to give you this, and you need to store these within your company as a record of your employment.
Step 2: Establish your Pay Periods and Delivery
Different businesses will have their own pay periods, based on how they run their operations. Most of the time, pay periods are weekly, or bi-weekly. Some states like New York may require weekly pay; it is important to adhere to what state and local regulations require. Typical pay days are fixed; usually on a Friday. If you choose to use a payroll management service to process payroll, you can specify when to process the payroll. You want to be regular with your pay periods – it is important to provide that level of consistency. Many organizations will either establish a Line of Credit with a bank, leverage payroll management financing services, or purchase insurance to protect them in the event that the revenue doesn’t line up with the pay period.
Another consideration is how you are going to distribute pay. Depending on your workforce, you are either physically cutting checks and handing them out, establishing a direct deposit for employees, or using a hybrid method – such as a refillable pay card. All methods come with different benefits and challenges, so you’ll need to find the best option for your business. Most companies prefer to leverage a payroll management system or payroll service to help with this; you can then deliver payment according to the method the employee prefers and the payroll service will take care of it for you.
Step 3: Make sure your payroll management system calculates taxes and withholding
Ugh – taxes. No one wants to think about taxes, and ensuring that you are withholding properly. However, failure to build tax withholding into your pay periods can get you into serious trouble. This is where having tools at your disposal can help. However, many businesses prefer to leverage a payroll management system which will take the employee information, the pay rates, pay periods, deductions, and automatically calculate the withholding per pay check.
Similarly, with taxes is the annual returns and providing tax forms for your employees. This means processing W-2 forms each tax year for employees and preparing your own corporate taxes for the year. In addition, some states also require quarterly tax returns which you should take into consideration. Again, this is a process that can be time-consuming for operators, and it’s better to either leverage a payroll service with a payroll management system to help on the employee W2 processing. As far as corporate taxes are concerned, it is recommended that you get a corporate accountant to help with filing. Going it alone can be a challenging task.
Step 4: Know your Wage and Labor Compliance Regulations
Providing employees competitive wages and salaries are important, and while you want to make sure your employees are happy working for you, you also want to make sure that your wage rates meet the minimum local, state and federal labor laws. Every state has a different minimum wage, and some localities have their own minimum.
The Department of Labor Established the Fair Labor Standard Act (FLSA), which displays the current minimum wage rates and rules for Compliance. There are also a lot of other resources such as Tax and Wage Cards that provide state and regional wage rates.
In the end, you want to review these wage and hour laws as you establish a payroll management system, and when possible, consult with experts to help you through these regulations.
Step 5: Recording Time (and Overtime)
Core to providing accurate pay to your employees is properly tracking exactly the time they worked. The majority of your staff will be hourly, so with hourly employees is – tracking their hours worked. This is where you can build a manual schedule of each staff member, where they are working in the business (Front of House, Back of House, Host, etc), and the appropriate rate they will be paid for those hours worked. Most companies will leverage a timekeeping system, either incorporated into their Point of Sale (POS) system, or connected to their payroll management system.
Having this automated is typically better for large operations, since schedules can get complicated. But for smaller operations, companies may just want to keep a detailed spreadsheet. It’s important that it’s accurate, so if you are using a manual method you will need to have your employees sign off and agree to the number of hours they worked. If you don’t have a strong bookkeeping method in place, it’s probably worth the investment to automate it.
While you have established a wage rate that is competitive and meets the FLSA standards, there is a chance that your employees may be faced with working overtime. Even with proper time collection and scheduling, you will ultimately have staff working overtime. It’s important to review the FLSA regulations for overtime since employees that work overtime must be paid a premium for that time. Failure to properly pay overtime can get you into trouble, so you either want to make sure you track this properly, or leverage a payroll management system to help automate this process for you.
While there are other factors to consider, these 5 steps can help you get the core components of a payroll management system in place. This is just part 1 of a 4 part series on Payroll management essentials; in the next part, we will discuss the intricacies of the tipped employee, and how you need to set up your payroll management process for handling tips.