Payroll is the total amount a business pays their employees for the work they’ve completed.
It’s part of payroll management: the process of calculating and paying salaries, filing taxes, and keeping accurate payroll records.
Managing payroll is a huge responsibility for any store, from those hiring occasional help to those chasing growth. It can be dry, time consuming, and stressful.
When payroll is done right, it’s smooth sailing, with happy employees paid on time and a tax-compliant business. But when done poorly, employees are unsatisfied, penalties for missing deadlines are huge, and non-compliance can be detrimental to your store.
Large companies have entire departments looking after payroll, but smaller stores and side gigs often have to figure everything out on their own.
This guide takes you through the payroll setup, tips to manage payroll, and pros and cons of each payroll system you can choose.
Table of Contents
What is payroll?
Payroll is the total amount of wages you pay your employees for the work they’ve done in a set period of time. Payroll frequency is usually set to weekly, every two weeks/twice a month, or monthly.
But payroll is more than just paying accurate wages. You also need to:
- Collect employee data
- Calculate net pay
- Report, withhold, and pay taxes
- Stay compliant with tax and labor laws
- Keep accurate records
Paying your employees on time is essential for team morale, a job well done, motivation (if you’re hiring temporary help), and employee retention (if you’re looking for long-term employees).
How to set up payroll, step by step
Here are the five steps you need to complete to set up your payroll:
- Register for an employer identification number (EIN)
- Collect W-4s from employees
- Establish a payroll schedule
- Withhold and pay taxes
- File tax forms and submit employee W-2s
1. Register for an employer identification number (EIN)
You need an employer identification number, or EIN, to hire and pay employees. EINs are unique numbers, the business version of a Social Security number.
An EIN is also known as an employer tax ID or a federal tax identification number. You’ll use it to report taxes and other relevant information to the IRS.
Online application is the easiest and fastest way to register for your EIN. Your information will be validated during the online session, and you’ll receive your EIN immediately.
Alternatively, you can apply by faxing or mailing a filled out SS-4 form to the correct number or address. You will receive your EIN within four business days over fax, or within four weeks for mail-in applications.
2. Collect W-4s from employees
For every employee you hire, you must collect their Form W-4, also called an Employee’s Withholding Certificate.
Each employee has to submit Form W-4 no later than their first day of employment. This form lets you withhold the correct federal income tax based on factors like marital status, dependents, other jobs or income, and deductions.
Make sure the employee signs the form; if they don’t, the form isn’t valid.
Your employees can complete and resubmit a new Form W-4 whenever their personal or financial circumstances change, and the IRS issues a new W-4 every year. Both are great reasons for employees to review their Form W-4 annually—feel free to encourage them to do so.
3. Establish a payroll schedule
Payroll schedule refers to how often your employees get paid. Common payroll schedules include:
- Weekly: once a week (52 paychecks per year)
- Biweekly: once every other week (26 paychecks per year)
- Semimonthly: twice a month (24 paychecks per year)
- Monthly: once a month (12 paychecks per year)
There’s no federal law that regulates how often you should pay your employees, but each state has its own law around the minimum pay frequency.
For example, in Arizona you have to pay your employees in intervals that are a maximum of 16 days apart (semimonthly), while Oregon and North Dakota require one monthly payment as a minimum. Make sure to check the state payday requirements when defining your payroll schedule.
Regarding the best pay period for your store, consider these three factors:
- Cost and time: weekly is the most expensive, monthly the least.
- Employee preferences: weekly is preferred by hourly employees, biweekly is favored (and how most employees in the US get paid), and monthly is least preferred.
- Payroll and accounting logistics: weekly is most difficult, biweekly can be complicated, while semimonthly and monthly are straightforward and easy.
4. Withhold and pay taxes
You have to withhold employment taxes from your employees for every pay period. The amount you withhold from each employee depends on the amount they earn and the information from their Form W-4.
These taxes include federal income tax withholding and Social Security and Medicare taxes.
Here are some resource to help you calculate, withhold, and pay the right taxes:
- Income Tax Withholding Assistant (Excel spreadsheet)
- Publication 15 (chapter titled “Withholding From Employees’ Wages”)
- Withholding Tables
You can also help your employees understand their tax withholding by encouraging them to use the tax withholding estimator.
5. File tax forms and submit employee W-2s
You’ll use Form 941 to file your quarterly federal tax return. This form lets you report income taxes, Social Security tax, or Medicare tax withheld from your employees, and your employer’s portion.
Form 941 is constantly updated, so always reference IRS instructions before completing and filing the form.
Every year, you also need to file employee W-2 forms with the Social Security Administration. This is currently due by the end of January 2022 for 2021 forms—the most accurate deadline is always listed in W-2 instructions. The SSA encourages all employers to file their W-2 forms electronically, as it helps with speed and accuracy.
You’re also responsible for filing a FUTA return (federal unemployment tax) annually.
Remember to keep an eye on your state and local tax regulations to understand your obligations and deadlines beyond federal taxes.
Tips for managing payroll
Now that you know how to set up your payroll, here are some key tips to make it a breeze to manage:
- Share a payroll calendar
- Maintain employee and payroll records
- Stay updated on tax laws
- Appoint a payroll manager
- Ask for employee feedback
1. Share a payroll calendar
A payroll calendar is a public, shareable calendar that outlines pay periods, pay dates, timecard due dates, payroll tasks, and holidays.
This will help your employees understand:
- When they’ll get paid
- The period they’re being paid for
- Potential delays or changes in pay dates (for example, because of a public holiday)
- Their deadlines for submitting timecards
Don’t assume your employees will know these dates by default. One survey revealed that less than half of employees ever had their payslip explained to them by their employer, and almost as many don’t understand the information on it.
Why would it be any different when it comes to payroll dates? A payroll calendar will reduce any confusion (and back-and-forth emails with employees asking for information).
For you, payroll calendar calls out key tasks to do, like depositing payments and filing tax forms, so you can pay your employees on time, every time.
Your financial health depends on how you manage payroll. Manage it with a payroll calendar so you can keep track of important dates, holidays, PTOs. It will also help your staff determine cut-off dates and payday. Share the calendar with supervisors and managers of your store or stores so they can transparently share it with their teams.
2. Maintain employee and payroll records
As you hire help for your store, you’ll generate documents and records for each employee, including:
- General information: employee name, address, SSN, date of birth
- Tax forms: W-4, state W-4, other withholding forms
- Pre-hiring records: job application, interview records
- Time and attendance records: time cards, total hours worked (per day and week), time off taken, remaining time off
- Payroll records: pay rate, total daily/weekly earnings, overtime earnings, bonus pay and commissions, benefits and deductions, contributions, expense reimbursements, raise documentation, pay periods, pay stubs
Federal law states you need to keep payroll records for three years, and payroll tax records (like unemployment taxes) for four years. Some documents, like retirement income and 401(k) plan details, you must keep for six years.
Make sure to check laws and requirements for payroll recordkeeping in your specific state, as they might be longer than federal ones. For example, the state of New York requires you to keep payroll records for six years.
You can keep paper copies of payroll records, or electronically store them on your device or using payroll software. In both cases, it’s crucial to keep employee and payroll records safe, as they contain sensitive, confidential information.
Organization is key — it’s critical that you maintain squeaky clean payroll records. There’s a lot to do each time you run payroll (including getting the employee withholdings right), and you’ve got to keep up with quarterly IRS reporting. Be sure to dedicate a secure place to keep up to four years of employee I-9 forms, W-2s, W-4s, state new hire forms, copies of all your filed tax forms, and always maintain the dates and amounts of all tax deposits, timesheets, and pay stubs. Different states have different requirements when it comes to record-keeping (even for employees who have been terminated), so staying on top of requirements and keeping your records clean and well maintained will make audits run smoothly—this will also help you spot issues before they arise.
3. Stay updated on tax laws
Payroll mistakes can cost you hundreds or even thousands of dollars in penalties. You must stay up to date with tax laws and requirements to make sure you:
- File and pay taxes on time
- Process payroll adhering to both federal and state laws
- Calculate and pay correct overtime
- Keep complete and accurate payroll records
One challenge is keeping up with laws that get updated regularly. The other one is making sure you stay compliant if and when your store grows—like expanding into different states, hiring remotely, or working with a mix of full-time employees and part-time contractors.
To stay up to date, regularly check in with the IRS website, your state tax websites (for example, taxes.ca.gov for California and comptroller.texas.gov for Texas), and tax hubs like the one from Deloitte.
4. Appoint a payroll manager
There’s a chance your payroll tasks will outgrow the time and energy you can dedicate to them. This might happen because you go from two to 20 employees, open more locations, or simply double down on the one store you have and the community you already serve.
In any of these cases, payroll may become stressful and overwhelming. Instead of losing sleep over it, consider appointing a payroll manager.
If you’re looking to keep your business small but need to offload payroll tasks from your plate, this could be a hybrid role for an existing employee or a part-time freelance role.
And if you’re looking to grow your store and need more robust payroll support, you can hire a full-time payroll manager, an external accountant, or a payroll service. They’ll do it better and faster than you—and they’re professionals who keep up with payroll laws and regulations.
Payroll is complex, which is why you should assemble your Payroll Squad. They key players who should be involved in your payroll process are: a) your payroll provider, b) an accountant (or other financial professional), and c) an HR business partner. Once you assemble this powerful Payroll Squad, you should divide and conquer; each person will own a part of the process and help you manage and approve payroll.
5. Ask for employee feedback
Make your payroll a two-way communication street. Instead of assuming your employees fully understand how payroll works (and that they’re happy with it), openly ask for their feedback and questions.
You can prompt employee feedback by asking:
- Do you have any questions or concerns around using or submitting time cards?
- Would you like to better understand your payslips?
- Do you have suggestions around payroll schedule?
- Is our payroll calendar clear and easy to navigate? Is there anything missing from it?
Everyone in your company is affected by payroll, so everyone likely will want to participate. It will help you improve how employees get paid. You can use questions and feedback to create internal documents and FAQs explaining your payroll process and how it impacts employees.
How to choose a payroll system
There are several ways you can manage your payroll:
- Manual/DIY payroll
- Payroll software
- Hire an accountant (in-house or external)
- Payroll services
Each has benefits and potential downsides—here’s what you need to know about each.
1. Manual/DIY payroll
Do-it-yourself payroll is often the go-to choice for those running a store as a side gig, and for small store owners with no plans to grow and expand.
This payroll system means you, the store owner, manually collect all documentation, file taxes over the phone, fax, or online, make deposits, and keep payroll and employment records.
- Cost-effective, as you don’t pay for a service, tool, or another person to do payroll
- Lots of control and insights into your revenue, cash flow, and payroll expenses
- It’s time-consuming (small business owners spend up to five hours on payroll every pay period), and hiring even one more employee adds extra tasks to your already full plate
- You can make errors and pay significant fines if you don’t catch them on time
- It’s your responsibility to stay up-to-date on tax laws and regulations
Manual payroll can be a great way to start managing your payroll, but it requires lots of focus, time, and energy to make sure you’re staying compliant.
2. Payroll software
Payroll software is a solution that streamlines and automates payroll.
You’re still in charge of managing the data that goes into the tool, but payroll software lets you store tax documents, file and send payroll taxes, deposit payments to your employees, and more, so you don’t have to do it manually.
DIY works when you have a small team, but it gets unmanageable as you grow, not just because it’s time consuming, but it opens up room for error. It can be dangerous. Using payroll software puts so much into automated mode and safeguards your time and business from lawsuits and expensive mistakes. It’s a small extra expense, but it pays off in the long run with the time you save and the peace of mind you get.
- You have lots of control and insight into data, reports, filings, history, and more
- Easy access from all devices thanks to being cloud-based
- Affordable, with many options priced under $40 per month
- You’re still liable for any errors—a payroll software provider doesn’t take over your responsibilities to file and pay taxes, pay employees, or keep records
- There’s a possible learning curve, depending on your platform of choice
Payroll software like Gusto reminds you when payroll is coming up, lets you track time and approve time off, helps you stay compliant by notifying you of tax law changes, handles benefits deductions, and more.
For store owners using Shopify POS, there are plenty of apps to choose from in the Shopify App Store to manage payroll, scheduling, and time tracking. Here are a few popular options, in no particular order:
3. Hire an accountant (in-house or external)
You can hire an in-house accountant or an external contractor to prepare your accounts, keep track of your finances, and manage your payroll.
If you hire internally, this person could manage payroll manually or use payroll software—both options work, and their pros/cons still apply to the person running payroll. If you hire a contractor accountant, they’ll have their own process and setup for managing their clients’ payroll.
- Extra time and focus for you, as you’ll offload dozens of tasks and reminders from your to-dos
- Removes stress and pressure from you to stay up-to-date on laws and handle payroll yourself
- You’ll have a go-to person for all questions about finances, taxes, compliance, recordkeeping, and more
- Less control over your filings and documentation
- It can be costly and disrupt your cash flow, especially if you bring a full-time employee on board
If you choose this option, be sure to spend sufficient time looking for the right person. Ask for recommendations from fellow store owners and entrepreneurs, look up reviews and experiences, and take the time to confirm the person fits your needs.
Every mistake that they make costs you, on the federal level, … almost $2,000. Let that sink in. On the tax level, probably about $300 for every error. If they make a deposit one day late, that’s $3,000 out of your funds. … So before you hire somebody saying, ‘This is just an easy job, I’m going to pay minimum wage,’ make sure that you can afford the penalties.
4. Payroll services
Payroll services, or payroll management companies, let you outsource their payroll management to a team of professionals. They calculate your payroll, file tax statements, deposit payments to employees, process new hires, and more.
- Zero stress on your plate, as you have a team of people handling every detail of your payroll management
- Enhanced assistance for business that grow and change rapidly, hire remotely, and/or operate stores in different states and countries
- Costly to start with, and can get even more expensive as you grow and need more support with payroll and compliance
While they can serve businesses of all sizes, payroll services are usually best suited for medium and large stores due to the scale of expertise and support they provide.
Get your payroll up and running
Set up your payroll in a way that works for your store and the way you’ve imagined its future.
With Shopify POS, you get a complete view of your incoming revenue and can manage all of your store’s outgoing fixed, variable, and mixed expenses—from the inventory you purchase to the amount you’re spending on labor based on your employee scheduling. Just install one of the payroll and team management apps in our app store to take control of your payroll, scheduling, and labor cost management today.