For most small business owners, doing payroll is the most time-consuming and confusing part of your company’s operations. Even the tiniest problems can tie up crucial company resources or lower employee morale, so it’s important to minimize these issues as soon as possible.
Use these following strategies to ensure your employees are accurately paid on time.
Decide what to manage in-house
It’s up to the business owner to ensure their payroll is accurate, but that doesn’t mean you have to handle all that paperwork by yourself. A National Small Business Association survey found that 45% of small businesses use a payroll service to help them navigate legal processes.
Although you will be handing parts of your payroll to someone else, you’ll still be responsible for approving payroll and making sure the information you provided is accurate and current.
Set up a payroll system
If you prefer to set up your own payroll system, you have three options:
- Manual: Done by hand for cost savings, but it’s often time-consuming.
- Outsourced: Either a PEO or independent contractor will handle payroll for you.
- Software: Freshbooks and Quickbooks have comprehensive features that include payroll ledgers, HR add-ons, and automatic tax filing to make your job easier.
The right payroll system depends on your budget, number of employees, and expertise.
Decide on pay schedule and salary status
Setting up a payroll system can help organize your process, but it won’t automatically optimize it. You still need to determine how often your employees, contractors, or outsourcing agencies get paid. First, decide on a pay schedule, keep it consistent and follow wage laws in your state.
Second, decide on wage status based on skill level and market rate. You can choose between paying a salary (exempt employees) or hourly (non-exempt employees).
Maintain employee records
Federal and state governments have laws about storing and retaining payroll records in case the IRS requires access to this information. Be sure to keep payroll records for up to 3 years.
There are even laws regarding the disposal of payroll records before and after termination. For example, active employee records must be kept at the business for two years, then shredded.
Outline payroll processes and policies
Before actually using your payroll process, establish a standard policy your employees can work from. This ensures everyone knows what proper payroll looks like in your business.
Be sure to add details regarding:
- Workweek (when it begins and ends)
- Timekeeping procedures
- Meal periods and break times
- Overtime rules
- Pay dates
- Pay periods
- Direct deposit or paychecks
- Payroll deductions
- Final paychecks
Your payroll policy may also cover pay increases, holiday pay, salary advances and adjustments, W-2 distributions, overpayments, and expense reimbursements.
Keep track of cash flow (in and out)
If a big purchase is coming up, but you don’t have enough cash flow to pay for that item and your employees, you’ll have to, by law, pay your employees first. At the same time, you need to ensure your tax burden is settled, so you can also pay the IRS proper employment taxes.
If you’re regularly short during the payroll period, look at your cash flow to determine the root of the problem. Keeping an organized payroll ledger can help you stay on top of your payments.
Stay up to date with wage laws
One of the most challenging, but important, parts of the payroll process is staying up to date with wage laws. If you have a designated payroll department or outsource your HR compliance, you won’t have much trouble with maintaining your financial and legal obligation to the IRS.
However, if you decide to take on this burden yourself, you need to know the basics of FICA taxes and income taxes in your state. You’ll also need to check federal and state laws regularly.
Story by Jessica Perkins
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