Businesses with employees have added responsibilities to their staff and the government. Not only do you have to pay your employees on time, but you also need to file reports and make payroll tax deposits regularly. While some companies have in-house payroll departments, many entrepreneurs choose to work with a payroll provider for small businesses. Outsourcing this vital task lets you focus on running your business and ensures that your employees and tax filing responsibilities are handled. Learn more about payroll options for small business owners, how to set up a payroll system, and ways to make payroll when you're short on cash.

How to Set Up a Payroll System

Before you can pay employees or select a payroll provider for a small business, you need to set up your business payroll process. There are five steps involved in setting up a payroll system.

Get an Employer Identification Number

An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is a number the IRS uses to identify a business entity. You need an EIN for employees’ withholding taxes and tax forms. You can apply for an EIN through the IRS website in just a few minutes.

Decide on a type of payroll system

There are many payroll options for small business owners. You can handle it in-house or select a payroll provider for small business entities. The right choice depends on your business needs, how much time you have available, and your skill set.

If you are good with numbers and have some free time, for example, you can use payroll software, such as Gusto or Quickbooks by Intuit. While Quickbooks is widely known as accounting software, it offers HR tools like payroll, tax calculations, and time-off reporting. Both companies offer payroll solutions for small businesses, including payroll reports, invoicing, retirement plans, and limiting HR tools.

Otherwise, outsourcing to full-service payroll companies like Paychex or ADP is a wise choice. They offer automated payroll solutions that streamline the payroll process while complying with all tax laws. Additionally, they may provide customizable solutions, including benefits administration, health insurance, workers' compensation, and customer support that small business owners need. Small payroll companies also tend to offer these HR services, but they may be more affordable and flexible than larger companies.

Have your new hires fill out tax and bank forms

Your new employees need to fill out a Form W-4 and provide you with their Social Security number, filing status, and number of dependents. With this information, you can calculate your business payroll, including paychecks and taxes withheld. If you’re paying employees via direct deposit, they must also provide their bank information.

Decide on a payroll schedule

Pay frequency varies based on the types of workers and their industry. Biweekly (aka every other week) is the most common, and weekly is the next choice, followed by semi-monthly (specific days such as the 1^st and the 15^th) and monthly. No matter how often you pay your employees, you should have a robust time and attendance solution to ensure employees are paid appropriately. These HR tools also keep you out of trouble with the government.

So, how do you decide what payroll schedule is right for your business? To start, you should check with your state’s labor or workforce office to see what pay schedules comply with your state’s labor laws. From there, you should consider your employee pay expectations and the particulars of your business. If you're still unsure, consider hiring a CPA or speaking with industry peers to weigh your options.

Set up a bank account for payroll

Most business owners have a business bank account, so using that same account for payroll is tempting. The best option is to open a separate bank account. This makes it easier to maintain payroll records and ensure you have enough cash in the account to cover employee wages every pay period.

For example, you need $20,000 every two weeks to make payroll. If you had just one account, you’d have to mentally keep track of that number and ensure your bank balance doesn't dip below that amount. With a separate, dedicated payroll account, you can simply transfer payroll deposits into the account and run your business with the balance in your operating account.

Should You Hire a CPA To Do Your Payroll?

If you don't want to be involved in the payroll process, you might want to hire a bookkeeper and/or Certified Public Accountant (CPA) as your payroll provider for small business. While this is not their primary function, many professionals offer payroll services to supplement their accounting and tax businesses. Pricing varies for these services, so be sure to factor that in when making a decision.

When you outsource business payroll to a third party, you are still responsible for the accuracy of the information and approvals. But you don't have to do all of the time-consuming paperwork yourself.

Here are a few benefits of leveraging a payroll provider and staff:

• They help you stay on top of changes in tax requirements. For example, you currently have to keep records of employment taxes for four years. That’s just one of many tax requirements – it could be extremely time-consuming to stay up to date on all of them.
• You may be able to find payroll software that integrates with your time-tracking software – or has its own time-tracking features. If you have hourly employees, this can make it much easier to calculate payroll.
• By using payroll solutions for a small business, you are likely to reduce the frequency and severity of payroll mistakes. It may be easy to rectify inaccurate employee paychecks, but the IRS might not be so understanding.

As with any system, the first version doesn’t have to be the final version. You should constantly evaluate the system – particularly in the early going – to find areas for improvement.

How Do You Run Payroll?

Now that you know how to set up a payroll system, the next step is to run payroll. Even when outsourcing payroll to a payroll provider for a small business, many entrepreneurs choose to run payroll themselves.

Here are the basic steps on how to process payroll:

1. Calculate your employees’ net pay. To do that, you have to calculate their gross pay, which could be a fixed amount or based on employee hours. Remember to include overtime pay, bonuses, commissions, and other factors. You also have to determine their income tax withholdings, including FICA taxes (Medicare taxes and Social Security taxes) and any other applicable income taxes. Fortunately, all of the payroll options for small business handle these calculations for you.
2. Send the net pay to employees. Employees can choose between an electronic deposit or a physical check. Most employees choose to have electronic deposits made to a linked bank account or reloadable debit card. If they choose a paper check, you can mail it to their home or give it to them in person.
3. Report wages and taxes. Payroll taxes must be reported to Federal, state, and local tax authorities on a regular basis. State tax laws vary by location, so having a service provider adept at local rules is crucial. You must also provide a breakdown of the employees' income, taxes, and withholding on their pay stubs electronically or on paper. Many small business payroll platforms offer employees self-service so they can grab information as needed.
4. Send tax payments. After you file taxes, you must make deposits to the tax authorities electronically or by mail.

As you can imagine, this process is much easier with the help of a payroll provider for small business, using a bookkeeper or CPA, or assigning one of your staff to handle payroll duties.

How to Make Payroll

You can have the best payroll provider for small business in the world, but if there’s not enough money in your business bank account to make payroll every pay period, your business is going to be in trouble.

So, how do you ensure there’s always enough money to make payroll?

Small business owners must balance today's business needs with the long-term growth of the company. Balancing these competing priorities can be challenging. When this happens, it pays to evaluate short-term financing options to provide the cash you need. Here are a few possibilities:

Term Loan

A term loan provides a small business owner with upfront cash to be repaid on a predefined payment schedule. Term loans typically have a fixed interest rate and a consistent monthly payment. You can get a term loan for between $25K and $500K, with payment plans ranging from 12 to 36 months. The length of a term loan makes it a good option for small business owners who expect to be low on cash for a year or more.

Business Line of Credit

Have enough cash to make payroll now, but not sure if you will in the future? A business line of credit might be the right choice for your small business. With this financing option, you can borrow what you need and when you need it. While there may be an annual fee, you'll only pay interest on the amounts borrowed.

A business line of credit typically has a variable interest rate. If you carry a balance in a rising interest rate environment, your monthly payments and interest charges could quickly balloon to unaffordable levels.

Business Credit Card

A business credit card is a good way to make payroll in an emergency. Business credit cards tend to have high interest rates, and there are additional fees for cash withdrawals.

When applying for a new business credit card, you may qualify for a 0% APR introductory offer. These APR promotions tend to last for about one year, and they eliminate interest charges on purchases, balance transfers, or both, depending on the card features. If you cannot repay the balance, then interest charges will accumulate once the promo period expires.

The Bottom Line

With the right payroll provider for a small business, growing businesses will be well-situated to meet their short-term and long-term goals. Not only will it allow you to run business payroll effectively, but you'll also be in tax compliance to avoid government penalties and fees. But what if you need short-term financing to cover payroll costs? You could go with a traditional bank loan, but it may not get approved before your next payroll deposit is due. However, an online small business lender may be able to get you the cash you need to cover payroll in as little as a few days.

Frequently Asked Questions (FAQs)

How Much Does a Small Business Payroll Service Cost?

The best payroll providers for small business owners typically charge between $30 to $100 per employee per month. Your actual cost may vary depending on how frequently you pay, how many employees you have, and what other features you sign up for. We recommend you consult with ADP, Paychex, and a few small payroll companies to compare pricing, options, and customer service to find the best solution for your business.

What is the Best Way to Payroll for a Small Business?

The best way to do business payroll for your company is to outsource the process to someone who offers payroll solutions for a small business. These services are typically budget-friendly, and they ensure all tax filing requirements are met. Plus, they allow you to focus on running your growing business to boost revenues and increase profitability.

How Much Does ADP Cost for a Small Business?

The price for ADP payroll services varies based on the size of your business, how frequently you pay employees, and other services you require. Pricing starts at $29 per month plus $5 per employee for unlimited payroll runs, QuickBooks Online integration, employee self-service, filing of Federal and state taxes, and more.

Is Paychex or ADP Better?

When choosing the best payroll provider for small business, Paychex vs. ADP is a tough decision. Both companies offer business payroll solutions, workers' compensation, health insurance, and other benefits. However, ADP has numerous user-friendly HR tools and features that Paychex does not, including a free mobile app so you can handle payroll needs on the go (or while on vacation). While both of these payroll providers offer quality service, the best choice for your business depends on the features you value most and how much they charge.

Does QuickBooks Do Payroll?

Yes, you can use QuickBooks to handle your payroll needs. All QuickBooks Online Payroll plans offer full-service payroll features. The accounting software can file Federal and state taxes, pay employees, and provide payroll reporting.

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