For new and even experienced entrepreneurs, the process of managing payroll can feel like a complicated jigsaw. Even if you run a small business, you still need to follow the same laws as larger corporate entities that have entire teams devoted to payroll processing.
The biggest challenge for coming up with a payroll solution is managing all of the many moving parts. Small business owners are responsible for filing tax forms with local, state and federal entities with every payroll cycle. Simply paying your team on time and electronically—through direct deposit, for instance— is not enough. Your company needs to focus on many moving parts, especially from a tax and deductions perspective.
If you’re planning to build your own payroll process from the ground-up—especially if you are your small business’s only employee—you’ll want to follow these 3 tips:
1. Know the common pitfalls—so you can avoid them
It’s common for details to slip through the cracks, especially since companies can process anywhere from 12 to 24 payroll cycles—once or twice a month, depending on the pay periods that you’ve defined—throughout the year. Here are some common areas of oversight that small businesses run into, according to one payroll services expert:
- Pre-tax deductions, such as health insurance
- Compliance with child support
- Oversight of back taxes and penalties
- Overseeing prior wage and tax information
- Errors in documentation related to tax reporting or filing
- Uncashed payroll checks that need to be submitted to the state
- Managing team members who aren’t on a formal company payroll
- Misclassification of employees as independent contractors
- A lack of understanding of the Fair Labor Standards Act
- Not keeping adequate records of payroll for IRS
- A lack of a clear process for managing time off
- Mismanaging employee overtime
- Mismanaging payroll taxes
- Unclear protocols for managing workers’ compensation
- Absence of formal protocols for year-end filings
- Miscalculations of state taxes and federal taxes
- Lack of software and processes for time tracking when it comes to hourly or part-time employees
At some point, every business will reach a point of scale in which it makes sense to fully outsource all payroll operations. All over the world, there are third-party companies that take on the function of outsourced HR and payroll processing. A payroll service is especially valuable for companies with employees in multiple states and countries—each being subject to a separate set of laws.
But, let’s say that you’re running a business in which there are only one or two employees, including yourself. When your entity is small, you might be able to manage payroll processing using some hybrid of spreadsheets and payroll processing software, rather than a full-service option.
“There’s an abundance of different tools on the market that simplify the process of managing payroll independently and removing the need for an accountant to do this job for you,” explains Steve Pritchard, founder of an alternative credit check company called Checklate.
“You still need to pay for the most effective tools and payroll software, but the cost will likely be less than that of paying an accountant, so it’s a worthwhile investment.”
2. Build a repeatable, replicable system with your very first new hire
Payroll processing is one of the biggest time sinks for small business owners. It’s also one of the biggest business risks—what happens if the people who run payroll for your company need to take time off, for instance? Are you personally ready, as a business owner, to sacrifice your weekends and evenings to keeping up with reporting protocols?
No matter the payroll option you choose—whether you’re using an online payroll system, working in a spreadsheet, or using pen and paper—you’ll save time and decrease the potential for error by setting up a system. Even if that first “new hire” is yourself, you’ll want to make sure that you outline and repeat the same process.
“You should think of setting up a payroll system right at the start of establishing your business,” says Pritchard. “Make sure that you have the necessary payroll processing resources in place before you bring on your first new hire, before they start their job. You need to be able to pay people on time and without confusion.”
With this approach, you can easily audit and flag potential problems, as well as ensure that they won’t scale up with your company. With every new employee that you bring on, you can be confident that your payroll processing solution is working right. A system will also enable easier delegation.
One tip that Pritchard has for do-it-yourself payroll processing is to invest in the right technology. Investing in the wrong option could cost you valuable time. He recommends that small business owners pay close attention to their payroll software’s end user experience, in order to make sure that it isn’t confusing.
“An easy-to-follow user experience is only part of your equation,” explains Pritchard. “You need to make sure that your payroll software is compliant with the latest legal requirements in the countries in which you’re operating—including choosing a system that makes it possible to manage tax filings, pensions and student loan contributions.”
You’ll also want a payroll processing option that generates pay stubs on your behalf, so that you’re not caught up with unnecessarily filing and paperwork. Your goal, with your system, will be to save time.
Once you build your payroll processing infrastructure from the ground-up, you’ll know how your business runs, in-and-out. Eventually, you may consider working with an expert. In the meantime, you can be confident that your own payroll system is running right.
You may want to test the integrity of your system for glitches, or work with an accountant to help you set up and manage it.
3. Create a checklist to maintain accurate data
Whether you’re running payroll yourself or working with an accounting partner, the integrity of your system will depend on the caliber of your data.
Even a full-service payroll provider risks making mistakes if the information that you provide is inaccurate. That’s why it’s helpful to create a checklist of steps to take, even if you’re running a basic payroll operation that only covers a few team members.
Even a few simple reminders can help with preventing issues with the potential to bubble up. Lauren Burke, marketing assistant at payroll solutions provider, PrimePay, recommends that small business owners take the following steps:
- Obtain an employer identification number (EIN) from the federal government.
- Determine if you need a local ID, in your area, for state and local government taxes.
- Ensure that all employees complete withholding form W-4, so that you can withhold the correct federal income tax from their pay.
- Determine the pay periods for which you’ll disburse payments to your employees. Set up a calendar reminder beforehand, so that you never forget to process employee payroll.
- Provide payday schedules to employees. Make sure that you look up the laws in your area and use your payroll software to stick to these dates.
- Ensure that you have a process in place with your administrative and accounting teams to track employee hours, overtime, paid time off and other business requirements. You need precise and accurate records to maintain compliance with the Fair Labor Standards Act.
- Run your payroll. When you arrive at this stage, it means that you’ve already filed relevant forms to streamline your state, federal and local tax withholdings. At this point, payroll processing requires the click of a few buttons.
- Periodically, audit your processes. Catch problems before they have the opportunity to amplify. When businesses scale, so do simple, logistical administrative errors.
Create a list. Print it out. Follow the steps of your payroll process, with precision, until you can repeat all of these steps from memory. Assess gaps as soon as possible, and focus on improving efficiencies over time.
Moving forward with powerful payroll decisions
Your payroll is your business’s most important expense. Don’t let it become more complicated than it needs to be, and make sure that you have the right solutions in place for managing the varying moving parts.
A thoughtful system will help you have time and ensure that you spend your time efficiently. Get more hours back in your day by avoiding challenges, off-the-bat.