Designing and setting up a payroll system is one of the final steps in getting a new business off the ground. Federal and state laws and tax regulations also make it one of the most important. In-house design starts with a decision to process payroll manually or using a computer. Although the choice is up to each business owner, an electronic payroll system can reduce payroll processing time, increase accuracy and make it easier to remain in compliance with laws and tax regulations.

Getting Started

Internal controls are essential for creating a secure, efficient payroll system. Before getting into designing the actual payroll system, review a list of payroll internal control best practices. Create a written control policy statement and incorporate internal controls as you work through designing the system. Review Fair Labor Standards and laws for your state. Some states requires businesses to pay employees bi-weekly. Find out if your state has this requirement before deciding how often to pay employees. Once you decide how often to pay employees, choose a method of recording time and attendance, and establish procedures for submitting time card information.

Data Collection

Review Internal Revenue Service regulations for collecting and submitting new hire information. Gather and organize new hire paperwork such as W-4 tax forms, I-9 employment eligibility verification, insurance and retirement plan forms. Establish procedures for collecting and submitting new hire information to the appropriate federal, state and tax agencies. Next, ensure employee information remains current by creating procedures for employees to follow when submitting changes to their information. Finish the data collection phase of the payroll system by establishing methods for verifying time card information, such as requiring department managers to verify time and attendance before employees submit time cards.

Payroll Processing

The processing phase of a payroll system design includes procedures for creating, printing and distributing paychecks. A computerized payroll system automates much of the work involved in creating paychecks, but you will still need to ensure the system is set up to receive annual updates to payroll tax tables. Decide whether to print hard copy paychecks or direct-deposit checks into employee bank accounts. Although direct deposit has upfront and ongoing costs, the National Federation of Independent Businesses reports that a small business with 10 employees on its payroll can save about $13.50 each pay period using direct deposit .

Payroll Tax Filing

The IRS and state tax agencies require employers to submit payroll tax withholdings and payroll tax reports either quarterly or annually, depending on the size of the business. Review state filing requirements and read the IRS’s Employers Tax Guide to make sure you are clear about reporting and filing requirements. Set up an online account to transmit tax payments electronically or mark the date reports and tax payments must go out to ensure they reach the appropriate agency on or before the filing or payment due date.