A payroll system is the process through which your employees log their time worked, the way in which wages for that time are distributed. While this appears simple at first, as the number of your employees grows, and calculations for sick days, holidays, and vacation days, and various rates of pay, including overtime must be factored in, it can become stressful task.

As an employer, you must ensure your employees are paid on time, withhold the correct amount of taxes from them (including federal, state and local), their Social Security and Medicare taxes and any other taxes that the employee has designated. As specified by law, all employers must also report any tax liabilities to appropriate agencies and to employees. All of this can seem like a hassle when setting up a small business, but here are some great tips to help you set up your small business payroll system:

1)    Get your Employer Identification Number (EIN): EINs are given out by the IRS and are required to be obtained before any employees are hired within your organization. You can apply an EIN very easily by calling the IRS or applying online. Note: Some states require employers to obtain State and Local ID numbers.

2)    File W-4s: Any new employee must fill out a W-4 form so employers know how much they must withhold in federal taxes. This is usually filled out and returned on the first day of employment. Other forms include the I-9, W-2, and the W-5. Each of these can be found on the IRS website.

3)    Document hours worked: No matter if the employee is a independent contractor, part-time, or full-time employee, documenting all of the hours an employee has worked will save you work and stress in the long run, especially if the IRS ever audits you.

4)    Maintain a Set Pay Cycle: Most companies choose to pay their employees every two weeks, or twice a month. Depending on the nature of your business, you may decide to pay more or less frequently than that. Whatever your decision, it is important to stay consistent in your system.

By staying on top of your bookkeeping, run payroll efficiently, keep easy-to-access files and records, and report all payroll taxes to the IRS, your payroll system should streamline much of the effort you put into your small business. In many cases, investing in payroll software, or an accountant specialized in crunching the numbers can give you long-term savings.

It is vital that your small business complies with all current labor laws as dictated by state and local policies. If an employee works overtime, it is important to remember to pay him or her 1.5x per hour as dictated by overtime law. If employees qualify for Earned Income Credit (EIC) and have a child who also qualifies, they are entitled to receive those payments through their working, fiscal year. Overall, your payroll system depends on numerous factors depending on the type of business you run, the number and type of workers you employ, and the amount of paperwork with which you are willing to work.