Payroll can be confusing and bit intimidating if you don't know what you are doing. There are people and tools that can make it easier for you, but having a general knowledge of payroll is always a good idea when you are a business owner. So, what is payroll and how can you set it up so it isn't so bewildering? Payroll can be defined as the list of employees you need to pay for work rendered and the sum of all financial records of salaries, wages, bonuses, and deductions. The size of your business will determine who will take care of payroll, how they'll go about setting it up to begin with, how they'll do it from pay period to pay period, and the details that make payroll unique to your business.

Who can take care of my payroll?

People want to get paid and someone has to make sure it's done right, so who is it that you should hire to take care of this important part of your business? In a small business it is often the owner, or a hired bookkeeper that will take care of payroll and distribute the checks each pay period. A small to medium sized business may hire a bookkeeper, accountant, or certified payroll specialist to manage their payroll. Large businesses have several options to choose from. They can have payroll split between the Human Resources department to collect employee information, and the Accounting department to distribute checks, or a department specifically dedicated to payroll with certified payroll professionals, or they can outsource to a payroll bureau or payroll service company to take care of their payroll needs.

How do I go about setting up payroll for my new business?

The first thing you need when you're about to hire employees for the first time is to obtain a Federal Employer Identification Number (EIN). An EIN is a nine-digit number assigned to a business from the IRS much like a social security number assigned to an individual for tax filing and reporting purposes. If you have employees, you operate your business as a corporation or partnership, you work in the alcohol, tobacco, or firearms industries, or several other industries listed on the IRS website, you are required by law to have an EIN.

While in contact with the IRS, make sure your business meets the minimum wage requirements, has the necessary forms for quarterly and annual tax reporting, and you meet the withholding requirements for income tax, Social Security, and Medicare. You may also want to set up an escrow type account to hold the money deducted to pay to the federal and state authorities. The next step is to contact your state and local tax authorities to see if you need something similar to the EIN in your local area. When you are done with the legal side of setting up your payroll and you make sure you are in compliance with payroll legislation, the next step is to find the payroll solution that fits your business and budget.

What are my options for doing payroll?

There are three basic solutions to payroll. The simplest solution, though perhaps not the most cost effective, for a small or medium sized business owner is to hire someone else to do it. Just remember when you are in the hiring process to test an applicant's knowledge of bookkeeping and payroll, and make sure they're honest. There are some people who go to schools and get certified specifically for payroll duties. In the United States, payroll professionals are certified by the American Payroll Association and are separated into two separate certification groups. The first and lower certification is the Fundamental Payroll Certification (FPC) and the second is the Certified Payroll Profession (CPP). Both of these certification levels could be a good solution to your payroll needs. Hiring someone else simplifies the process for you so you don't have to keep up on payroll law and legislation among your other job duties, but it also takes payroll out of your hands making you rely on someone else to do the important task.

If you are a small business owner and don't want to hire on a bookkeeper for your payroll duties, the most cost and time effective solution is to do it yourself and find a payroll software program to assist you. There are payroll programs available for purchase that make the process simple. They can help you with your tax reporting, keep the time clock for you, and offer direct deposit ready files. As long as the program is set up correctly to begin with and kept up to date it will keep payday running smoothly. Payroll software varies in what features they offer, the support available, and the ease of use. Be sure to take time to evaluate your needs and find a payroll software program that fits them best.

If your business is a little larger you'll probably have an accounting or payroll department to handle the checks or you will outsource your payroll. Outsourcing can be a great way to go as the companies you hire to do it are built specifically to handle payroll needs. A payroll service can reduce the direct costs of having trained employees and their programs to handle payroll. This may also be an attractive option because of the increasing complexity in payroll legislation. Annual changes in tax codes, insurance, and deductions can be difficult to keep up with, and expensive to train for. There are several reputable companies out there whose sole purpose is to perform other companies' payroll. Outsourcing puts the responsibility on someone else's shoulders and leaves you more time to do what you do best.

So what are the real details of payroll?

Regardless of whether you are using a payroll program, hiring someone to do payroll for you, or outsourcing it, there are several basic questions concerning payroll that need answers: How are your employees being paid? Is their pay type hourly, salary, commission, some other way, or a combination? What will your pay period be? Will you pay your employees weekly, bi-weekly, bi-monthly, monthly, by contract, or another period? How many paid holidays will your employees receive? How many sick days? Do you have to deduct for benefits? Are you offering a retirement plan, and if so are you offering matching contributions? Will you offer direct deposit? The questions could be endless, but the questions to be answered will depend on the business you run and the number of people you employ.

What are my tax liabilities?

Taxes can be the bane of a payroll specialist's existence, but luckily, there are only four different taxes that are crucial to be taken out of your employee paychecks, although there are others that you, as an employer, are responsible for that cannot be deducted from your employees.

The first tax that should be deducted from employees' paychecks is the Federal Income Tax. The federal withholding rate is determined by what deductions the employee's take on their W-4 at the beginning of the year or on their hire date, and on their income bracket of the previous year. Federal withholdings range from 10% - 35%. Several tables are available through the IRS to help you determine your employees' withholdings.

Under the Federal Insurance Contributions Act (FICA) the second tax that is essential to deduct is Social Security which is 6.2% of your employee paychecks up to their first $106,800 (2009) of taxable wages. The employer then is required to match that 6.2%. This tax and the Medicare Tax support Social Security, which some day when you retire, you will be able to apply for.

The other tax required under FICA is the Medicare Tax. The amount of withholdings for Medicare is 1.45% of the employee's income and is required to be matched by the employer as well. No credits or withholding exemptions are permitted for the calculation of FICA taxes.

The fourth tax that is crucial to deduct from employee paychecks is State and/or local income tax. The rate on this tax varies from state to state, so check with your local tax authorities.

The Federal Unemployment Tax (FUTA) is separate from federal income taxes and is the responsibility of the employer. The FUTA tax rate is 6.2% of the first $7000 you pay to each of your employees, but you can take a credit against your federal tax by the amounts you paid to the state unemployment. The credit cannot be more than 5.4% of taxable wages.

All of these taxes should be figured and paid quarterly, unless you pay less than $1000 in Social Security and Medicare taxes during the year, in which case you pay this tax annually. The form filed with the quarterly tax payment is the 941 form. Those small employers who only pay the tax annually have to file form 944 rather than 941.