A 7-Step Guide to Setting Up Your Payroll for Start-Up and Small Business Owners

Starting a new business is a thrilling and challenging experience that requires courage, dedication, and passion. As a new entrepreneur, you are the captain of your ship, and the journey ahead is long and challenging.

One of the most significant challenges you will face as a business owner is setting up your payroll system. Think of your payroll system as the engine room of your ship. It's the heart of your business that keeps everything running smoothly. It’s where you keep track of your employees’ hours, calculate their wages, and manage their benefits. It’s also where you comply with government regulations and tax requirements. In this guide, we will explore the essential steps you need to take to set up your payroll system. We will provide practical examples and tips to help you manage your payroll efficiently and effectively.

The first step in setting up your payroll system is to classify your employees. Your employees' classification determines how you pay them and how you withhold taxes. There are two types of employees: exempt and non-exempt. Exempt employees are salaried employees who are exempt from overtime pay.

Non-exempt employees are hourly employees who are entitled to overtime pay.

It's important to classify your employees correctly to avoid legal issues and compliance penalties. Practical tip:

Keep accurate records of your employees' hours and job duties. Consult with a lawyer or accountant if you are unsure how to classify your employees.

An Employer Identification Number (EIN) is a unique nine-digit number that the Internal Revenue Service (IRS) assigns to businesses for tax purposes. You need an EIN to hire employees, open a bank account, and file your tax returns. Obtaining an EIN is a straightforward process. You can apply for an EIN online, by mail, fax, or phone. Once you have your EIN, keep it safe, as you will need it for all your tax-related transactions.

In the Philippines, the equivalent of an Employer Identification Number (EIN) is called the Employer's Tax Identification Number (TIN). The Bureau of Internal Revenue (BIR) issues this nine-digit number to businesses for tax purposes, similar to the EIN in the United States.

The TIN is used to identify and track a company's tax obligations, including income tax, value-added tax, and withholding tax. Like the EIN, businesses in the Philippines need to obtain a TIN to operate legally, hire employees, open bank accounts, and file tax returns. Practical tip:

Apply for your EIN as soon as you start your business. It's a critical step in setting up your payroll system.

Your payroll schedule determines how often you pay your employees. You can choose to pay your employees weekly, bi-weekly, semi-monthly, or monthly. It's essential to set up a payroll schedule that works for both you and your employees. Consider your employees' needs when setting up your payroll schedule. Some employees may prefer to be paid more frequently to help them manage their expenses better. Other employees may prefer to be paid monthly to simplify their budgeting and financial planning. Practical tip:

Consider your cash flow when setting up your payroll schedule. If you pay your employees too frequently, it can affect your cash flow and your ability to pay your bills on time.

As an employer, you are responsible for withholding and paying federal, state, and local taxes on behalf of your employees. You also need to pay Social Security and Medicare taxes, also known as FICA taxes.

In the Philippines, employers are required to withhold and remit taxes on behalf of their employees, including income tax and social security contributions.

Social security contributions include payments to the Social Security System (SSS) for private sector employees, Government Service Insurance System (GSIS) for government employees, and Pag-IBIG Fund for housing and other related benefits.

Employers also need to pay contributions to the Philippine Health Insurance Corporation (PhilHealth) for the health insurance of their employees.

These contributions are essential to ensure that employees are covered by social security and health insurance programs and can enjoy their benefits when needed. Calculating and withholding taxes can be a daunting task, but it's crucial to comply with government regulations. You can use payroll software to help you calculate and withhold taxes accurately. It's important to comply with tax regulations to ensure a positive and successful business experience. By withholding the correct amount of taxes from your employees' paychecks, you can avoid any legal issues and compliance penalties. This will allow you to focus on growing your business and achieving your goals without any unnecessary distractions.

Remember that compliance with tax regulations is not just a legal requirement, but also a way to demonstrate your commitment to running an ethical and responsible business. Practical tip:

Consult with a tax professional to ensure that you are complying with all tax regulations.

Employee benefits are a crucial part of your payroll system. You need to decide which benefits you will offer to your employees, such as health insurance, retirement plans, and paid time off. Offering employee benefits can help you attract and retain top talent, but it can also be expensive.

Consider your budget when deciding which benefits to offer. You may not be able to afford to offer all the benefits you would like, so you need to prioritize. Survey your employees to find out what benefits they value most, and use this information to guide your decision-making.

Practical tip:

Research different benefit options and providers to find the best value for your budget. Consider working with a benefits broker who can help you find the right plans for your business.

Choosing a payroll provider is an essential step in setting up your payroll system. A payroll provider can help you manage your payroll, calculate taxes, and ensure compliance with government regulations. They can also provide employee self-service portals, direct deposit, and other features to simplify your payroll process.

When choosing a payroll provider, consider factors such as cost, features, and customer service. Look for a provider that offers the features you need at a price you can afford. Check online reviews and ask for referrals from other business owners to find a reputable provider with excellent customer service.

Practical tip:

Ask for a demo or trial period before committing to a payroll provider to ensure that their service meets your needs.

Now that you have completed all the previous steps, it's time to set up your payroll system. Your payroll system should include everything you need to manage your payroll, such as employee records, timesheets, tax forms, and pay stubs. Your payroll provider should provide you with the tools you need to set up your system, and you may also need to invest in additional software or equipment.

When setting up your payroll system, make sure that all your data is accurate and up-to-date. Test your system before you start processing payroll to ensure that everything is working correctly. Train your employees on how to use the system, and provide them with access to their pay stubs and other information through an employee self-service portal.

Practical tip:

Develop a payroll processing checklist to ensure that you don't miss any critical steps.

Setting up a payroll system can be challenging, but it's a crucial part of running a successful business. By following the steps outlined in this guide, you can set up your payroll system efficiently and effectively. Remember to classify your employees correctly, obtain an EIN, set up your payroll schedule, calculate and withhold taxes, determine employee benefits, choose a payroll provider, and set up your payroll system.

With a well-designed payroll system in place, you can focus on growing your business and achieving your goals.