Even the smallest new businesses can benefit from a streamlined, uniform payroll system, saving time and money (especially by helping avoid penalties from the IRS later on). Get started by checking out these 9 simple steps.

1. Obtain an Employer Identification Number (EIN)

Often referred to as an Employer Tax ID, this is the number you'll need to report taxes to Uncle Sam. You can apply for one directly from the IRS.

2. Register with State Governments

Once you've received your federal EIN, you'll be able to register with your state tax collection agency. Use this link to pick out your state and fill out the requisite form.

3. Collect Employee W-4s

Make sure all new employees fill out their Federal Income Tax Withholding Form (W-4) and return it to you—it will be vital when figuring out the right amount of federal income tax to withhold from their pay.

4. Set a Pay Period

Check with your state agency to see if a particular one is required by law (many states require bi-monthly pay periods). If you have the choice between monthly and bi-monthly pay periods, be mindful of the balance between the normal employee preference for more frequent pay and the constraints and costs that writing extra checks will put on your business (e.g. the weekly calculation of expenditures, cutting checks, etc.).

5. Choose a Payroll System

Here's where the real thought comes in. To start, ask other small business owners what they use, then determine of those providers the following (either by research or direct questioning):

  • How user-friendly is it?
  • Does it interface well with any accounting systems you already have in place?
  • Is it adequately secure?
  • How much customization does the service allow? How much do you need?
  • How many employees is this service optimized for, and how many do you plan to have?
  • How much support is offered?

Though by no means an extensive list, some of the most popular payroll services for small business include:

  • QuickBooks from Intuit, with a baseline price and multiple option upgrades (find a great run-through of using QuickBooks here).
  • SurePayroll, which is more expensive at $45/month, but will file your tax returns for you.
  • ADP, long popular for midsized and larger businesses, it now has small business options to complement its established customer service infrastructure.

A longer list can be found here.

6. Keep Vital Records on File

Assorted state and federal laws require that employers hold on to different records for different lengths of time. W-4s, for example, must be available on file for three years after an employee's termination. Any records providing reasons for paying different wages to employees of opposite sexes (including job evaluations, wage rates and seniority systems) must be kept for two years. Check these Equal Employment Opportunity Commission and Department of Labor pages for more information on exactly what needs to be kept and for how long, then get organized. A little organizational effort now could save you an immense headache (and potentially an immense fine) later.

7. Set Clear Pay Standards for Employees

Some decisions regarding sick days, overtime, etc. will be made for you by state or federal laws (see our guide to employee hours and overtime, for example). But it's likely that many of these decisions will fall on you. Set these standards early, and stick to them uniformly. The goal is to create an environment where employees feel like they're treated fairly and aren't looking to take advantage, lest they upset a good thing.

8. Report Payroll Taxes

Either on a quarterly or yearly basis, you'll be required to submit certain payroll taxes to state and federal authorities. Start getting familiar with your requirements at the Employer's Tax Guide from the IRS.

9. Keep Monthly Records

A monthly accounting checklist of some sort should be used to track and manage business financials.