How to Set Up Payroll for a Small Business

The basic process for setting up payroll is:

1. Get an Employer Identification Number (EIN)
2. Collect the necessary employee forms from your workers (W-4s for withholding taxes, W-9s for contractors and I-9 for verification that they can legally work in the United States)
3. Set up your payroll in some kind of platform (or find an experienced bookkeeper)
4. Make sure there’s adequate money in the necessary account to fulfill payroll

A More Detailed List of Considerations for Small Business Payroll

Before you pay any employees – whether they’re fulltime or contract employees – you’ll want to have an Employer Identification Number. You can fill out a Form SS-4 and submit the form through fax or mail, but the easiest way to complete the process is through the IRS’s online form.

The IRS assigns unique EINs to every business for tax purposes. When you fill out any tax forms you will likely need to include this EIN.

Arizona-Specific Rules

Some states require employers to get their own unique state-specific version of an EIN. Arizona doesn’t require you to do that, but you will need to register your EIN with the Arizona Department of Revenue (ADOR) in order to file your payroll withholding returns.

You can see all of Arizona’s payroll withholding filing obligations here.

Arizona business owners should also be familiar with the record keeping requirements for unemployment taxes, which includes payroll journals and check stubs.

Tax Penalties for Failure to do Payroll Withholding and Deposits Correctly  

The IRS also levies penalties against businesses with unpaid payroll taxes. If you’re curious about all the legal tax implications and IRS rules to which you will need to adhere, you may want to read through the IRS’s Employer’s Tax Guide for 2021.

Are My Employees Actually Independent Contractors?

Whether or not you need to withhold any taxes for your workers depends on whether they’re your employees or independent contractors. Independent contractors are frequently:

• Not told exactly when, where and how to do their work
• Required to cover their own expenses and use their own tools and supplies
• Contracted to work on a project-by-project basis
• Not paid for time off, sick days, etc.
• Not given benefits like health insurance

The line between what is and isn’t an employee isn’t always straightforward. There may even be incentives for you to treat employees like contractors when you’re just starting your business. In most cases, if someone is working for you fulltime and not on a temporary basis, they will be considered an employee.

This distinction will have a big impact on your payroll and withholding responsibilities. Independent contractors must do their own withholding and pay their own Medicare, Social Security and unemployment taxes. You must withhold those taxes for employees and are accountable to pay for half of them.

Decide on Pay Periods

In Arizona, employers are required to pay employees at least twice a month (pay periods can be no longer than 16 days). You must pay employees no more than five days after when the money was earned. Companies with payroll processing located outside of Arizona, which is common for nation-wide chains or employers, have 10 days to pay instead of five.

Choose Your Payroll Process and Platform

A payroll process is simply determining how you’re going to track time or salary workers. If you’re paying workers hourly, you should purchase a reliable hour tracking tool to avoid incorrectly counting hours and over- or underpaying workers for their time. Salaried workers are easier to pay since each period you’ll essentially be paying their annual salary divided by 26.

If you are going to handle payroll yourself you will need to subscribe to and acquaint yourself with a bookkeeping platform, like QuickBooks. Most SMB owners outsource payroll to bookkeepers who do it professionally for an affordable rate.

Get Help With Your Payroll in Phoenix

The team at H&H Accounting Services perform bookkeeping and payroll services for dozens of businesses throughout the Valley. Our team understands how important your payroll is to you, your employees and your ability to operate. We are committed to punctuality and accuracy in our payroll and bookkeeping services.

We also offer an array business tax and consulting services. If you just want to learn about your payroll options from a local Phoenix accountant or are looking for advice on local regulations or help choosing employee benefit plans, we can help.



Call us at (480) 561-5805 for a free consultation – we’ll come to you!