Getting your payroll, HR, and compliance systems set up properly from the very beginning is important if you want your startup to grow smoothly. It's not just about staying on the right side of the law, it’s also about creating a positive workplace where your team feels supported.

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In the early days, it’s easy for startups to encounter challenges like misclassifying employees, juggling payroll taxes, or struggling to keep organized employee records. But mistakes in these areas can come back to haunt you, often leading to hefty fines or even slowing down your business.

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Take employee classification, for example. If you get it wrong, you could be on the hook for back pay and penalties. And if your record-keeping isn’t up to par, you might find yourself scrambling during a compliance audit.

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This article discusses how to set up your payroll, HR, and compliance for your first 10 employees.

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Preparing to Hire: Legal and Administrative Essentials

Before hiring your first employees, you must establish a solid legal and administrative foundation. This ensures compliance with federal and state regulations and sets the stage for smooth HR and payroll operations.

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Here’s how:

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Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a unique nine-digit number assigned by the IRS to identify your business for tax purposes. It's essential for hiring employees, opening a business bank account, and filing business taxes.

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You can apply for an EIN online through the IRS website. The application process is straightforward, and you'll receive your EIN immediately upon completion. This service is available to businesses whose principal office is located in the United States or U.S. Territories.

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Register for State and Local Tax IDs

In addition to a federal EIN, your business may need to obtain state and local tax identification numbers. These are required for reporting employee income taxes, sales taxes, and unemployment insurance taxes.

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Requirements vary by state, so consult your state's Department of Revenue or equivalent agency. Some states offer combined registration for multiple tax types, while others require separate applications.

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Set Up a Business Bank Account

Separating your personal and business finances is important for accurate record-keeping and legal protection.

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A dedicated business bank account simplifies bookkeeping, enhances your business's credibility, and is often required when applying for business loans or credit.

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To open a business bank account, you'll need your EIN, business formation documents, and ownership agreements. Research different banks to find one that offers services tailored to small businesses.

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Understand Local Labor Laws

Compliance with labor laws helps you avoid legal issues and promotes a fair workplace. Areas to focus on include:

• Employee Classification: Ensure correct classification of workers as employees or independent contractors to comply with tax and labor laws.
• Wage and Hour Laws: Adhere to minimum wage requirements, overtime pay regulations, and mandated breaks.
• Anti-Discrimination Laws: Implement policies that prevent discrimination based on race, gender, age, disability, and other protected characteristics.
• Occupational Safety and Health: Maintain a safe working environment by OSHA standards.

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Building Your HR Foundation

Implementing important HR practices early on (such as accurate employee classification, comprehensive employee handbooks, structured onboarding processes, and meticulous record-keeping) will help you comply with labor laws while promoting a positive workplace culture and streamlining operations.

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These are important for attracting and retaining top talent, reducing legal risks, and making your startup successful.

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Classify Employees Correctly

Accurate employee classification is necessary for legal compliance and efficient HR management. Misclassifying workers can lead to penalties and legal disputes. The different types of employees include:

• Full-Time Employees: They work a standard number of hours per week and are eligible for benefits like health insurance and paid leave.
• Part-Time Employees: Work fewer hours than full-time staff and may have limited access to benefits.
• Independent Contractors: Operate as self-employed individuals, controlling their work schedules and methods, and are responsible for their taxes and benefits.

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Develop an Employee Handbook

An employee handbook outlines your company's policies, procedures, and expectations. It provides employees with a clear understanding of workplace conduct, benefits, and grievance procedures.

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Its benefits include:

• Legal Compliance: Helps ensure adherence to federal and state employment laws.
• Consistency: Promotes uniform application of company policies.
• Conflict Resolution: Provides a reference point for addressing workplace disputes.
• Cultural Integration: Communicates your company's mission, vision, and values to employees.

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Establish Onboarding Processes

Effective onboarding helps integrate new hires and set them up for success. A structured onboarding process should include:

• Preparation: Ensure all necessary equipment and access are ready before the employee's first day.
• Orientation: Introduce company culture, policies, and team members.
• Training: Provide role-specific training and resources.
• Check-Ins: Schedule regular meetings to address questions and provide feedback.

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Implement Record-Keeping Systems

Maintaining accurate and confidential employee records is a legal requirement and a best practice for effective HR management. Important records include:

• Personal Information: Contact details, emergency contacts, and identification documents.
• Employment Documents: Job applications, offer letters, and contracts.
• Performance Records: Evaluations, disciplinary actions, and promotions.
• Payroll Information: Salary details, tax forms, and benefit enrollments.

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Setting Up Payroll Systems

A well-structured payroll process guarantees that employees are paid correctly and on schedule. It also helps avoid potential legal issues and financial penalties associated with tax miscalculations or non-compliance.

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Moreover, efficient payroll management contributes to the financial stability of the business by providing organized records for audits and financial reporting. Here’s how to set up a reliable payroll system:

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Choose the Right Payroll Schedule

The right payroll schedule affects your administrative workload and employee satisfaction. Common payroll schedules include:

• Weekly: Employees are paid once a week, totaling 52 pay periods annually. This schedule is ideal for hourly workers due to the frequent payouts but it requires more frequent payroll processing.
• Biweekly: Employees receive pay every two weeks, resulting in 26 pay periods per year. This schedule balances administrative efficiency with regular employee compensation.
• Semi-monthly: Payments are made twice a month, usually on the 15th and last day, totaling 24 pay periods annually. This schedule aligns well with monthly financial reporting.
• Monthly: Employees are paid once a month, totaling 12 pay periods per year. While this reduces administrative tasks, it may not be ideal for employees who prefer more frequent pay.

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When choosing a schedule, consider cash flow, administrative capacity, and employee preferences.

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Select a Payroll Processing Method

Decide how you'll manage payroll processing:

• Manual Processing: Involves calculating payroll by hand or using spreadsheets. While cost-effective, it's time-consuming and prone to errors.
• Payroll Software: Automates calculations, tax filings, and record-keeping. It reduces errors and saves time, making it suitable for growing startups.
• Outsourced Payroll Services: Engaging third-party providers to handle payroll tasks can free up internal resources and ensure compliance, though it may come at a higher cost.

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Evaluate your startup's size, budget, and expertise when selecting a processing method.

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Collect Important Employee Information

Gathering accurate employee information ensures compliance and accurate payroll processing. This information includes:

• Form W-4: Determines federal income tax withholding. Each employee must complete this form upon hiring.
• Direct Deposit Details: Collect bank account information for seamless salary transfers.
• Tax Identification Numbers: Obtain necessary state and local tax IDs for reporting and compliance.

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Calculate Gross Pay and Deductions

Accurate calculations ensure employees are paid correctly and tax obligations are met:

• Gross Pay: Calculate based on hourly rates or salaries, including overtime, bonuses, and commissions.
• Deductions: Subtract federal and state taxes, Social Security, Medicare, and any other applicable deductions.
• Net Pay: The amount employees receive after all deductions.

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Distribute Paychecks and Maintain Records

Choose between direct deposits, physical checks, or electronic payment systems based on convenience and cost. Keep detailed records of hours worked, wages paid, tax withholdings, and benefits.

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Ensuring Compliance and Avoiding Penalties

Here are tips to help your startup navigate federal and state regulations to avoid penalties:

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Stay Updated on Tax Obligations

Timely and accurate tax filings are important for startups to avoid penalties. The main federal tax deadlines include:

• March 15: Deadline for S-Corporation and partnership tax returns (Forms 1120S and 1065), or request an extension.
• April 15: Due date for C-Corporation income tax returns (Form 1120) and personal income taxes.
• Quarterly Estimated Taxes: Due on April 15, June 15, September 15, and January 15 of the following year.

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State-specific deadlines may vary. Hence, consult your state's tax authority for accurate dates. Use accounting software or hire a tax professional to ensure compliance and timely filing.

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Understand Wage and Hour Laws

Understanding wage and hour laws prevents legal issues and promotes fair compensation practices. Here’s what you must consider:

• Minimum Wage: Employers must pay at least the federal or state minimum wage, whichever is higher.
• Overtime Pay: Non-exempt employees are entitled to overtime pay at a rate not less than time and one-half their regular rate of pay for hours worked beyond 40 in a workweek.
• Exempt vs. Non-Exempt Classification: Properly classify employees to determine eligibility for overtime and minimum wage protections.

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Maintain Compliance with Employment Laws

Adhere to employment laws to promote a respectful and legally compliant workplace. Important regulations include:

• Anti-Discrimination Laws: Prohibit discrimination based on race, color, religion, sex, national origin, age, disability, or genetic information.
• Employee Rights: Ensure employees are aware of their rights regarding workplace safety, family and medical leave, and whistleblower protections.
• Workplace Safety Standards: Comply with Occupational Safety and Health Administration (OSHA) regulations to maintain a safe working environment.

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Prepare for Audits and Inspections

Being audit-ready shows you’re committed to compliance. This compliance streamlines the audit process. Steps to prepare include:

• Organize Documentation: Maintain up-to-date records of financial transactions, employee classifications, and compliance training.
• Implement Internal Controls: Establish checks and balances to prevent errors and fraud.
• Conduct Regular Reviews: Periodically assess your policies and procedures to ensure they align with current laws and best practices.

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Using Technology for Efficiency

Startups can focus on growth and maintain a solid operational foundation by using technology to automate processes and secure sensitive data.

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Use HR and Payroll Software

Integrated HR and payroll software offers startups a streamlined approach to managing employee data and payroll processes. These systems centralize information, reducing the risk of errors associated with manual data entry and ensuring consistency across HR functions.

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For instance, platforms like Gusto provide a unified database for employee management, thereby facilitating real-time updates and access to critical information.

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Moreover, integrated systems enhance reporting capabilities, enabling startups to easily generate comprehensive reports on employee performance, compensation, and compliance metrics.

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Automate Compliance Tracking

Staying compliant with changing labor laws and regulations can be challenging for startups. Automation tools within HR software can assist in monitoring and adapting to regulatory changes. This helps your business remain compliant without manual intervention.

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For instance, Mitratech's compliance tracking tools provide alerts and updates on legal requirements, thereby reducing the administrative burden and minimizing the risk of non-compliance.

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In addition, automated compliance features can assist in managing documentation, training, and reporting, further streamlining HR operations and safeguarding your startup against potential legal issues.

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Secure Data Management

Modern HR and payroll software prioritize data security by implementing robust encryption methods, multi-factor authentication, and compliance with data protection regulations such as GDPR.

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Platforms like Signal HRM enhance data security by using encryption to protect sensitive information. This prevents unauthorized access during a breach.

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Scaling Your HR and Payroll Systems

As your startup goes from a small team to a growing organization, you may find it more challenging to manage human resources and payroll. What once were straightforward processes can become challenging if you don’t have scalable systems in place.

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Here are what you should do to accommodate this growth:

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Plan for Growth

As your startup grows beyond its initial team, adapt your HR and payroll systems to accommodate increased complexity. Implementing scalable HR software solutions, such as Rippling or BambooHR, can automate payroll processing, benefits administration, and compliance management.

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These platforms streamline operations and provide the flexibility needed to support a growing workforce.

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In addition, integrating performance management tools and Applicant Tracking Systems (ATS) can enhance efficiency and reduce manual workloads. This will allow your HR team to focus on strategic initiatives.

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You position your startup for sustainable growth and minimize potential operational challenges by adopting comprehensive HR solutions early.

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Continuous Training and Development

Continuous learning enhances employee engagement and retention. Developing HR policies that encourage ongoing professional development (such as allocating budgets for training programs, offering flexible learning options, and recognizing skill advancement) will also boost employee satisfaction.

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Regularly assess employee skills and provide targeted training opportunities to improve individual performance and ensure your team can adapt to the competitive and dynamic business environment.

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Evaluate and Adjust Systems Regularly

Periodic reviews of your HR and payroll processes ensure they meet the needs of your organization. As your startup grows, audit the existing systems to identify areas for improvement, enhance compliance, and optimize efficiency.

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Also, Stay informed about changes in labor laws and industry best practices to update policies. Engage with HR professionals or consultants for regular evaluations so that you can gain valuable insights that will help you tailor your HR infrastructure to support ongoing growth.

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Wrapping Up

Getting your EIN, setting up your state and local tax IDs, and opening a separate business bank account are some of the first steps in setting up payroll the right way. They create a strong foundation for handling taxes and keeping your filings organized and on time.

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As your fractional Chief of Staff, Chore takes care of all these for you (from start to finish) so you never have to worry about missing deadlines or filing the wrong paperwork.

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Need help with classifying employees, creating an employee handbook, or building a smooth onboarding experience? You can breathe easy knowing Chore’s team brings best practices from global payroll management, benefits administration, and compliance tracking straight to your startup.

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No more stressing over picking a payroll schedule or getting tax withholdings right. Chore easily integrates with the tools you already use and runs payroll automatically and accurately, every pay period.

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By handing off these important but time-consuming tasks to Chore, you can save up to 500 hours a year (time you can use to secure product-market fit, raise your next round, or build your dream team faster). Learn more.

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FAQs

What information do I need from employees to process payroll?

Here are the information you need from employees to process payroll:

• Personal information (full legal name, home address, date of birth, and Social Security Number)
• Tax forms (Federal Form W-4 and state tax withholding forms)
• Employment details
• Direct deposit information (bank name, routing number, account number, and account type)
• Benefits and deductions
• Timekeeping records
• Emergency contact information

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What legal requirements must I meet when hiring my first employees?

The legal requirements you must meet when hiring your first employees include:

• Minimum wage and overtime compliance
• Accurate recordkeeping
• Anti-discrimination and equal opportunity
• Workplace safety standards
• Employee classification
• Mandatory workplace postings
• State and local compliance

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How do I ensure compliance with HR regulations?

Here’s how to ensure compliance with HR regulations:

• Develop clear HR policies and employee handbook
• Maintain accurate employee records
• Stay informed about labor laws
• Provide regular training
• Use HR Technology
• Consult HR professionals

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How do I handle payroll taxes and deductions?

Follow these steps to handle payroll taxes and deductions:

• Collect necessary employee information (Form W-4, state tax withholding forms, direct deposit authorization, and Form I-9)
• Calculate gross pay
• Determine taxable wages
• Calculate and withhold payroll taxes
• Account for employer-paid taxes
• Calculate net pay
• Remit taxes to appropriate agencies
• File required tax forms
• Maintain accurate records of employee information and tax forms, payroll calculations and deductions, and tax filings and payment confirmations.

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