Payroll Setup Checklist: What You Need Before Your First Pay Run

If you are also hiring your first employee, read our post about hiring your first employee in Rancho Cucamonga for the bigger picture. This post is the checklist that comes right before the first pay run.

Your business information

Payroll starts with your business, not your people. Whoever runs your payroll needs to know who the employer is. That means your legal business name, your tax id number, and your business address. These details sit on the forms that go to the agencies, so they need to be right.

You also need your state and local payroll accounts. Most states want an employer account set up before you pay anyone. Some cities and counties have their own payroll rules too. The exact accounts depend on where your business lives and where your people work.

This is the part owners skip, then scramble on pay day. Get the business side set up first. Then the people side goes faster.

Here is what to gather about your business.

• Your legal business name.
• Your tax id number.
• Your business address.
• Your state employer account, if your state needs one.
• Any local payroll account your city or county needs.

Dates and rules change. Confirm the exact accounts you need with your payroll provider, your CPA, or the agency.

What you collect from each new employee

Every new employee creates a small set of records before they get paid. These records hold who they are, how to reach them, and how much to take out of their pay. You keep these on file for as long as the person works for you.

The two forms most workers fill out are a hiring form and a tax form. The hiring form holds their name, address, and the details your payroll needs. The tax form tells you how much to take out of their pay for taxes. Your payroll provider usually has its own version of these.

You also need the pay rate for each person. Is the worker hourly or salaried? If hourly, what is the rate per hour? If salaried, what is the pay for each pay period? Write it down so there is no guess work on pay day.

Here is what to collect from each new employee.

• A hiring form with name, address and start date.
• A tax form that sets how much to take out.
• The pay rate, hourly or salary.
• How they want to be paid, such as bank transfer or check.
• Any extra amounts taken out, like benefits or garnishments.

Confirm the exact forms your payroll provider needs. They vary by state and setup.

Your pay rules and your pay schedule

A pay schedule is how often you run payroll. The common ones are weekly, every two weeks, twice a month, or once a month. Each one has its own pay dates. The schedule you pick changes your cash flow and your books, so pick one you can live with all year.

Pay rules are the choices that sit on top of the schedule. Do you pay for time worked or for the period that just ended? When does overtime start? How are bonuses and tips handled? These rules tell your payroll provider how to figure out each check.

Put the schedule and the rules in one place. A simple calendar with every pay date marked is enough. When the dates are written down, they do not sneak up on you.

Here is what to decide about pay.

• How often you run payroll.
• The pay date for each run.
• Whether pay is for time worked or the period that just ended.
• When overtime starts and how it is paid.
• How bonuses and tips are handled, if you have them.

Your payroll provider or your CPA can help you weigh each schedule.

How you will track hours

If you have hourly workers, you need a way to track hours. The hours feed the pay, and the pay feeds the books. When the hours are clean, the pay is clean. When the hours are a guess, the pay is a guess.

A time sheet is the simplest tool. Each worker writes down their hours each day. At the end of the period, the hours get added up and checked. A time clock app does the same thing but keeps the math for you.

The point is to have one record that both you and the worker agree on. When the hours are agreed before pay day, there is no argument after. Ask your payroll provider what time tracking works with your setup.

Here is what to set up for hours.

• A time sheet or time clock app for each hourly worker.
• A way to add up the hours each period.
• A step where the worker checks the hours.
• A place to keep the signed off hours.

Which bank account pays your people

Payroll leaves your bank on pay day. You need one account set up for it, and that account needs to have enough cash in it on the right date. A bounced pay run is hard on your team and hard on your books.

Pick the account before the first run. Tell your payroll provider which account to pull from. Then watch the balance in the days before each pay date so the money is there when it needs to be.

The same account should show up in your books. When the pay leaves the bank, the books show it leaving the same account. That is part of the clean tie between payroll and your books.

Here is what to set up for the bank.

• One business account for payroll.
• The account linked to your payroll provider.
• A habit of checking the balance before pay day.
• The same account tracked in your books.

Setting up payroll accounts in your books

Payroll is not one line in your books. It is a set of lines. Wages go on a wages line. The taxes taken out go on their own lines. The taxes you owe as the employer go on another line. When each piece has its own place, your reports show the real cost of your people.

Set these lines up before the first pay run, not after. If the lines are not ready, the first run lands in a general bucket and stays there. Moving it later is harder than setting it up right the first time.

Your CPA decides the accounting method and we keep the books consistent with it. The point is to use the same method every time so the books and the bank agree. When the books are clean, the year end forms are just a sum of the lines you already have.

We are QuickBooks Online Accountants, or QBOA, and we work in QuickBooks Online and Xero. We keep the payroll lines in the same software your books live in.

Here is what the books need for payroll.

• A wages line for gross pay.
• Lines for the taxes taken out of the pay.
• A line for the taxes you owe as the employer.
• A benefits line, if you offer benefits.
• The bank account tied to the payroll runs.

Run a practice check before the real pay run

A practice check is a dry run before the real pay day. You run the numbers as if it were pay day, but no money moves. You look at the gross pay, the amounts taken out, and the net pay for each worker. You check that each number lands where it should.

This catches the small mistakes that cost the most. A wrong pay rate. A missing tax amount. A worker left off the run. A practice check finds these before the cash leaves the bank, when they are still easy to fix.

Ask your payroll provider how to run a practice check in your setup. Some providers have a preview step built in. Others let you run a test and delete it. Either way, do one before the first real run.

Here is what to check in a practice run.

• Each worker is on the run.
• Each pay rate is right.
• The amounts taken out look correct.
• The net pay matches what you expect.
• The total matches what will leave the bank.

Made up example for teaching

A small shop hiring its first two employees

A small shop is hiring its first two employees. One is hourly and one is salaried. The owner has never run payroll before and wants to get it right the first time.

The owner starts with the business side. They confirm their tax id number and set up the state employer account their state needs. They pick a pay schedule of every two weeks, with pay dates on Friday.

For each worker, the owner collects a hiring form, a tax form, and the pay rate. The hourly worker gets a time sheet. The salaried worker does not. The owner picks one business account for payroll and links it to their own payroll provider.

The owner sets up the payroll lines in the books with our help. Wages go on a wages line. The taxes taken out go on their own lines. The employer taxes go on another line. Then the owner runs a practice check with their payroll provider. Two numbers were off. The owner fixes them before the real run.

On the first real pay day, the cash leaves the bank. The books show it on the same day the owner's CPA tells them to use. Each piece lands in the right line. The close that month is just a sum.

This is a made up example for teaching. Your numbers and your setup are your own. Confirm the dates and rules that apply to you with your payroll provider, your CPA, or the agency.

Common questions

What do I need before my first pay run? You need your business details, a form and pay rate for each worker, a pay schedule, a way to track hours, the bank account that pays your people, and the payroll lines in your books. This post is a checklist for each one.

Who picks the pay schedule? You do, with help from your payroll provider or your CPA. The schedule changes your cash flow and your books.

How does payroll show up in my books? Wages go on a wages line. The taxes taken out go on their own lines. The employer taxes go on another line. Your CPA decides the accounting method and we keep the books consistent with it.

Do you run the payroll? We offer monthly payroll with pay runs every pay period, pay checks, filings and a clean tie to your books. You can read more on our payroll page or reach us on our contact page.