Payroll management can be complex. From calculating salaries and taxes to ensuring compliance with labor laws and regulations, small business owners and finance teams have a lot on their plates. Unfortunately, payroll errors do happen, and sometimes delays can impact your company’s financial health and your employees’ wellbeing.
The solution? Finding a reliable and precise payroll system that maintains financial integrity and avoids wage disputes and penalties. Use the tips below to help simplify your payroll management process and minimize costly mistakes.
How does small business payroll work?
Payroll accounting is the process of recording and managing all financial transactions related to employee compensation, such as salaries, wages, bonuses, and deductions.
There are several steps involved in managing small business payroll, including:
- Collecting employee information: Name, address, Social Security number, and bank account information
- Setting up payroll: Choosing a payroll schedule, determining pay rates, and setting up tax withholding
- Calculating employee pay: Computing the employee’s gross income (hours worked multiplied by pay rate), withholding taxes, and net pay (gross revenue minus taxes and other deductions)
- Paying employees: Via direct deposit, check, or cash
- Filing payroll taxes: Depositing withheld taxes to the government and filing payroll tax returns
W-4s and W-2s
W-4 and W-2 forms are necessary tax documents used in payroll management:
- W-4s collect employee tax withholding information. Employees fill out a W-4 when hired and when their tax withholding information changes.
- W-2s are issued to employees at the end of the year to report their wages and taxes for the year. As an employer, you must file W-2s with the Social Security Administration and provide copies to your employees.
How to manage your business payroll
These payroll management solutions make the task easier and more efficient for you and your employees. Some small businesses use a combination of the following solutions:
- In-house accountant/accounting team: Having an in-house team allows for better control and oversight of the payroll process, ensuring accuracy and efficiency.
- Payroll management software: A key advantage of payroll management software is eliminating the need for manual calculations and data entry that can be time-consuming and prone to human error.
- Outsourcing to external accountants: Outsourcing ensures your payroll is managed by experts who are up-to-date on the latest tax laws and regulations, reducing the risk of payroll errors and compliance issues.
Tips for small business payroll management
Do: Create a payroll budget
Developing a payroll budget is vital to the overall business planning process. A precise budget allows you to manage your cash flow more confidently and make informed decisions. This also helps you prioritize employee compensation and guarantee timely payment for employees and independent contractors.
Don’t: Forget to file tax forms on time
Stay on top of your tax obligations, as deadlines occur every three months for businesses. If uncertain, refer to the IRS tax calendar and your state’s taxation department’s website. Timely and accurate submission prevents penalties and accruing interest.
Do: Classify your employees correctly
You must differentiate between full-time, part-time, and contract workers and classify them fairly and legally to ensure proper compensation and benefits. Failure to do so may lead to disputes, audits, and penalties from government agencies.
Don’t: Make exceptions to your payroll policies
Deviating from your established payroll policies harms workplace dynamics and could expose your company to legal consequences and compliance issues. Sticking to your policies upholds a fair and inclusive work environment.
Do: Streamline your onboarding process
Consider digitizing onboarding paperwork––such as W-4 and W-9 forms, I-9s, and direct deposit documents––to expedite the onboarding process. This will save you the hassle of dealing with physical paperwork and allow you to pay your employees more quickly and efficiently.
Don’t: Get rid of employee records too soon
In the event of an official audit by the IRS, it can be extremely beneficial to have four years of payroll tax records easily accessible. This streamlines the audit process and lets employers accurately complete and submit tax returns to government agencies.
Do: Have a team that handles payroll
Whether you have an in-house employee or hire an external accounting firm to outsource the task, having a designated team for payroll saves time and avoids costly payroll mistakes so you can handle other aspects of your business.
Don’t: Assume you know the overtime laws
Overtime laws vary from state to state, so it’s crucial to carefully review and comply with them. It becomes more complex if your company has employees in multiple states, which requires thorough research and adherence to each state’s laws and regulations.
Do: Maintain a consistent schedule
Establishing a consistent and predictable payroll schedule ensures that your employees receive their paychecks on time and creates a sense of trust and reliability in your company. Plus, it keeps you organized and avoids legal issues.
Don’t: Track hours and pay manually
Manually handling these processes can result in human error, leading to frustrated employees if their paychecks are inaccurate. Using automated systems ensures accuracy and reduces the risk of payroll errors.
Do: Automate your payroll processes
By streamlining your payroll processes, you can also have a more consistent payroll schedule, providing stability and reliability for your employees. Automated payroll saves valuable time and resources, so you can focus on growing your business.
Setting up your payroll process for success
At least once a year, your business should thoroughly review its active employees, pay rates, wages, and tax withholdings to verify alignment with current laws and regulations.
Internal audits can identify and correct payroll errors before they trigger external audits by the IRS or compliance issues. After completing an audit report, you should carefully review it and implement any necessary changes for future payroll processing.
In some cases, retroactive changes may be required, like providing back pay to an employee or submitting additional tax payments to the IRS. In the long run, regular payroll audits strengthen your small business’ financial standing.
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