What Payroll Documents Do You Need to Pay Employees?

Running payroll is an important part of business operations. It’s not volunteer work, after all, so it’s hard to keep people on staff if you can’t pay them. But if you’ve never processed payroll before, getting all the ducks in a row for the first time may feel downright intimidating. Or, at the very least, frustrating.

The upside here is, for the most part, once you have payroll set up properly, it’s just a matter of ongoing maintenance. In other words, getting started is the hard part. This article should help make it easier.

Let’s break down the basics of what paperwork and documents you’ll need to get the ball rolling, and how to make the entire process, from startup to recurring paychecks, as easy as possible.

Jump to:

• Things to consider and keep in mind
• Payroll documentation on the business side
• Payroll documentation on the employee side
• Implementing payroll
• Final thoughts

Things to consider and keep in mind

To be completely fair, there are indeed quite a few details and nuances that go into any company’s payroll. It’s one of the reasons that CPAs are so important in the business world. But even businesses without dedicated accountants on staff have to run payroll, and not all of them outsource that function to third parties.

For teams that want to run payroll themselves (or at least set up the system themselves), there are portions of the process that can be done fairly easily, as long as you know what to account for:

• Some of the considerations are applicable across the entire country: federal income tax, social security and Department of Labor records are some of the major entries in that list.
• Some are restricted to specific localities: state and local income tax, worker’s compensation, unemployment insurance and withholding allowance certificates are a few worth mentioning.
• Some will require input from the employees themselves: I-9 and W-4 forms, direct deposit information and so forth.

Here’s a closer look at each of these categories.

Payroll documentation on the business side

Nationwide requirements

When businesses are ready to set up their payroll, there are a few things that are mandatory regardless of where in the U.S. they operate. Then, there are some things that are regional. We’ll cover the nationwide requirements first.

Business bank account

Perhaps a bit obvious, but in order to make payments to employees and staff, you need a bank account. Sure, the money has to come from somewhere, but from an accounting standpoint, there’s more to it than that. It’s a matter of keeping records to prove what has (and what hasn’t) been done. Oh, and it has to be a business account, as opposed to a personal one.

Employer Identification Number

You’ll need an EIN, which functions similar to a social security number, but for business entities, and is likewise issued by the IRS. It allows a business to properly report employee income and withholdings collected on the same.

Record of employee labor

You’ll need to keep a record of employee labor. You’re likely already tracking this to determine pay for staff, but it’s not only for accounting and tax purposes. The Department of Labor requires these records specifically for the purpose of audits.

Requirements vary by state, but the core idea is the same: The DOL record helps prove whether you’re adhering to labor laws and whether employees (and former employees) are truthfully reporting details should there be any disputes.

Regional requirements

Here is where things start to get messy. Each state has its own laws and systems. And even within the same state, different municipalities and local governments will have additional mandates, requirements and regulations. The disparity between different locations with regard to compliance issues is one reason why large corporations will be picky about where they set up shop.

State income taxes

Taxes are, again, a major component. Some states have their own income tax (on top of federal taxes), as do some individual cities and all have to be accounted for. In some cases, these will require their own tax ID numbers (such as the EIN, but for state or local governments).

Unemployment and worker’s compensation insurance

Along similar lines, some states handle unemployment insurance and worker’s compensation insurance with their own system. Most states function more or less identically and defer to federal standards. A few, though, are more particular in their legislation, and location-specific identifiers are required.

Your state or local government may require a unique income tax identifier number, unemployment ID number or worker’s compensation ID number, depending on where you’re located.

Payroll documentation on the employee side

Now that we’ve covered what you can arrange on your own without input from the staff you’ll be paying, there are some documents that you’ll have to have your teams fill out before the first checks can be cut.

Employee tax forms (W-4 and I-9)

First up are the federal income tax records. These are W-4 forms for internal staff and I-9 forms for freelancers. This information — which includes their mailing address and social security number — is how you’ll report their labor and earnings to the IRS.

Direct deposit information

Unless you plan to actually cut physical checks, you’ll also need your employees’ direct deposit information — bank accounts and routing numbers. Without those, you won’t be able to push out automated payments.

State withholding allowance certificate

Finally, there’s at least one regional requirement based on the state you operate in, and that’s the state withholding allowance certificate. Some states require additional paperwork regarding the income tax withholdings of employees instead of only using the federal forms. That’s where these certificates come in, and you’ll need them if you want to properly document automatic tax withholdings.

Implementing payroll

Ok, let’s assume you’ve collected everything (if not, stop reading and go do that — don’t worry, we’ll be here when you get back), and you’re prepared to start setting up the actual payroll system.

That means you have some decisions to make.

Decide on a pay schedule

You’ll need to determine a pay schedule. This can have a big impact on other things, such as how benefits are calculated (more on that below) and how some paycheck values are determined.

Choose which benefits you’ll offer

You’ll also need to determine what benefits, if any, you’ll be offering to staff. Many benefits impact pretax paycheck values, and some will involve additional employer contributions.

Find or create a payroll system

Last but not least, you’ll need to pick a method of actually tracking, calculating and issuing payments to employees. As hinted elsewhere in this article, this can be done in a number of ways, some more scalable than others.

The simplest solution is that of tracking via spreadsheets and issuing physical checks. It’s certainly one way to run payroll. But you’ll likely find it untenable beyond a dozen or so employees.

Most growing businesses opt either for payroll software, such as QuickBooks Payroll or Gusto, or outsourced payroll support, such as professional employer organizations. Each has its advantages, depending on the size of your organization and the particulars that might complicate payroll for your teams. As such, it’s best to shop around to find the best fit for your use case. And don’t be surprised if what works today doesn’t fit as well in a year or three from now due to growth.

Final thoughts

Payroll is important, and it can be quite the hair-pulling responsibility. But it’s definitely one you want to get right. All other things aside, your best bet is to avoid setting problematic precedents in the early days. Fixing minor process issues or correcting compliance errors on a small scale may seem easy, but they tend to get out of hand as headcount goes up.

At the end of the day, though, as long as you’re following regulations and keeping the crew paid, you’re on the right track.

Read Next: ​​The 8 Best Payroll Software and Services of 2023

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