Setting up a payroll system is important for every business that has at least one employee.

 It will help you keep track of their hours, wages, employment taxes and more. It can also protect you from incurring Internal Revenue Service (IRS) penalties.

When it comes to setting up a payroll system, there are multiple ways in which you can do this. One of those ways is to use Hubstaff,  which is a staff monitoring software. The other way is to follow the simple guide that I’ve explained in this blog post.

This step-by-step guide to setting up a payroll system should provide you with all the necessary information that you need. And hopefully, by the end of this post, you’ll have a much clearer idea of how to do so.

So, let’s get underway.

1.  Obtain an Employment Identification Number (EIN)

The first step is to obtain an Employment Identification Number from the IRS. Often referred to as an Employment Tax ID, the EIN is important for reporting taxes and any other documents to the IRS. This is key for reporting information about your employees to state agencies.

Applying for an EIN is simple, it can be done online or directly through the IRS.

2. Check State and Local Regulations

Sometimes, state or local governments require businesses to obtain ID numbers. This is perfectly normal and is often required in order to process taxes.

3. Understand the Difference Between Independent Contractor and Employee

Understanding the difference between the two is extremely important. Simply put, it impacts how income, Medicare, Social Security, and unemployment taxes are paid. To help you understand, use the following points as a guide:

  • Does the employer control when, where, and how the work is completed? If so, they are most likely an employee.
  • Is the relationship ongoing, or is the worker employed for a specific project with no guarantee of further employment? If the relationship is ongoing, they are most likely an employee.
  • Does the employer provide work-related tools such as a computer? If so, they are most likely an employee.

4. Take Care of Employee Paperwork

Within the first few days of hiring your employers, make sure you gather tax and payroll information. Also, make sure they receive their first paycheck on time.

Furthermore, each employee must complete a Federal Income Tax Withholding Form W-4. This provides you with all the relevant information to calculate the correct tax withholding.

5. Decide on a Pay Period

Whether it’s annually or bi-monthly, you need to decide on a pay-period for when you employees will receive their wages. You are also expected to withhold income tax for that period, even if the employee does not work the full period.

6. Document Your Employee Compensation Terms

Prior to setting up payroll, you’ll also want to consider how you track employee hours, paid time off (if applicable), and if and how you pay overtime. And remember, employee health plan and retirement contributions should also be deducted from their paychecks and paid to the appropriate organizations.

7. Payroll System

Payroll admin requires absolute attention and accuracy, therefore, I recommend doing a fair bit of research beforehand. Firstly, ask fellow business owners which methods they use. On most occasions, your options for managing payroll include in-house or outsourced options. As the employer, you are fully responsible for reporting and paying of all payroll taxes.

8. Running Payroll

Once you have the information you require, and you have checked it numerous times, you can begin to run your payroll.

9. Keep Records for Everything

This next step is possibly the most important of them, and it’s one that brings me back to Hubstaff. Simply put, Hubstaff is an employee tracking software that can be used to update your payroll. It has timesheets, expense tracking, and is a simple and streamlined way to manage your team and payments.

But why is this important?

Well, some federal and state laws insist you keep certain records on file for a certain time. For example, W-4 forms must be kept on file for three years after an employee has left your business. W-2s, tax forms, and dates and amounts of tax deposits all need to be filed.

10. Report Taxes

Payroll tax reports should be submitted to the appropriate authorities either quarterly or annually. For more information on this, visit the Employer’s tax guide. This provides clear guidance on all tax filing requirements.


After reading my blog post, I hope you have a clear understanding of the necessary steps to take for setting up a payroll system. Whether you’re using my guide as a helpful tool or calling in the experts at Hubstaff, remember to keep copies of your files and keep on track of those tax deposits.

Did you find my guide helpful? Let me know by commenting below.