BURBANK, Calif. — As businesses in Burbank prepare for 2026, understanding how to set up an effective payroll system is essential. Payroll is not just about calculating salaries; it involves compliance with federal and state tax regulations that will affect financial reporting and employee satisfaction.
What is Payroll?
Payroll refers to the system that businesses use to compensate their employees. This could include salaries, wages, bonuses, and deductions like taxes and benefits.
Why Setting Up Payroll Properly Matters
Failure to comply with payroll regulations can result in penalties, fines, and audits. According to the IRS, small businesses are at a heightened risk of errors due to a lack of resources devoted to payroll administration. In California, the Employment Development Department (EDD) enforces strict payroll laws that Burbank businesses must heed.
Steps to Set Up Payroll for Your Business
Here are the primary steps involved in establishing a payroll system that meets local and federal requirements.
1. Obtain an Employer Identification Number (EIN)
An EIN, or Employer Identification Number, is essential for any business with employees. This number is needed for tax reporting and can be obtained from the IRS online at no cost. According to IRS guidelines, you should apply for your EIN before your first payroll is processed.
2. Classify Your Employees Correctly
Employees must be classified either as employees or independent contractors. Misclassification can lead to severe penalties. According to IRS rules, employees are subject to employment taxes, while independent contractors handle their own taxes.[1] Misclassifying employees can result in fines reaching thousands of dollars.
3. Register with State Agencies
For businesses operating in California, registration with the EDD is mandatory before hiring employees. This includes setting up unemployment insurance (UI) and withholding taxes. Businesses must also comply with local wage laws, which can vary by city.
4. Decide on a Payroll Schedule
Choosing a payroll schedule—whether weekly, biweekly, or monthly—affects cash flow and compliance with wage laws. California law requires that employees receive paychecks at least twice a month.[2] Stick to a consistent schedule to help employees plan their finances.
5. Choose a Payroll System
Businesses have options from manual processes to software solutions. Options include:
- DIY methods using spreadsheets, which are manageable for small teams.
- Payroll software like Gusto or QuickBooks that automates tax calculations and filings. Evaluate your team size, budget, and specific needs to determine the best solution.
6. Collect Employee Information
Businesses are required to collect necessary employee information. This includes:
- Completed Form W-4, detailing tax withholding preferences.
- I-9 forms for verifying employment eligibility. Businesses must maintain confidentiality and comply with privacy laws while handling sensitive information.
7. Calculate Payroll Taxes and Deductions
Employers must withhold federal income tax, Social Security, and Medicare taxes from employee paychecks. According to 2026 tax regulations, rates can change annually, so businesses should confirm current rates with the IRS before processing payroll. In California, state taxes such as state income tax and SDI (State Disability Insurance) must also be considered.[3]
8. Issue Paychecks or Direct Deposits
Once the calculations are complete, employers must issue payment to employees. Direct deposit is increasingly popular, streamlining the payroll process and enhancing employee satisfaction.
9. File Taxes and Transmit Withholdings
Employers are responsible for filing payroll taxes and transmitting withholdings to the IRS and state agencies. Quarterly reports, such as the 941 form for federal taxes, must be submitted on time to avoid penalties. California employers are also required to file CA Form DE 9 quarterly with the EDD.[4]
10. Maintain Payroll Records
Accurate record-keeping is crucial for compliance and tax purposes. According to IRS guidelines, businesses should keep payroll records for at least four years. This includes timesheets, payroll calculations, and tax documents. Effective record maintenance can also assist in resolving disputes or audits promptly.
Common Mistakes in Payroll Setup
- Misclassification of workers: Failing to distinguish between employees and contractors can result in significant fines.
- Inaccurate withholding: Incorrect tax withholdings can lead to both employee dissatisfaction and legal penalties.
- Late filings: Delayed submission of payroll taxes often results in costly penalties.
Local Considerations for Burbank Businesses
Specific to Burbank, employers should be aware of local labor laws. The city imposes its own regulations regarding minimum wage and paid sick leave. The current minimum wage in Burbank is $15.50 per hour, exceeding California's statewide minimum hourly wage.$[5]
Conclusion
Establishing a compliant payroll system in Burbank is a complex but necessary task for business owners. With upcoming changes in 2026, particularly concerning tax rates and regulations, business owners must remain vigilant and proactive.
Operating without a solid payroll strategy can not only complicate issues with employees but can also lead to severe financial repercussions. Proactive planning and adherence to regulations will ensure that businesses can operate smoothly and avoid penalties.
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FAQ
What is a Payroll System?
A payroll system is a process used by businesses to calculate and distribute employee pay while ensuring compliance with tax laws and deductions.
What taxes must be withheld from employee paychecks?
Employers are required to withhold federal income tax, Social Security, Medicare, and applicable state taxes.
How often should I run payroll?
California law requires that employees be paid at least twice a month, although employers can choose to pay weekly or biweekly if preferred.
What is the penalty for misclassifying employees?
Fines for employee misclassification can go up to $1,000 per misclassified worker and possible back taxes owed.
How long should payroll records be maintained?
Payroll records should be kept for at least four years according to IRS guidelines, though state laws may require longer retention periods.
What happens if I miss a tax filing deadline?
Missing a tax filing deadline can result in penalties, interest on unpaid taxes, and potential audits from state and federal agencies.