The start of the year is a great time to reassess your business.
To grow sales and profits in 2020, you’ll need to process more transactions and serve more customers. You may also need to hire more staff, and managing payroll can be challenging for a growing company.
You need a system that will process payroll for more people in less time. Does your current process meet that standard?
Use these tips to decide if it’s time to reevaluate how you manage payroll.
Five Important Steps for Payroll
To evaluate your payroll system, consider how you manage each of these important tasks:
- Data collection: When an employee is hired, you need to collect information to withhold the proper amount of federal and state income taxes, and possibly withhold dollars to pay for company-provided benefits. If, for example, you offer a retirement plan, a worker may want payroll dollars withheld and invested in the plan.
- Calculating net pay: The net amount you pay each worker is the gross pay less tax withholdings, less any benefit payment withholdings.
- Payments: You must pay each worker by check, or by an electronic transfer to a bank account.
- Reporting: Federal and state tax withholdings for each employee must be reported to the IRS and state department of revenue. In the same way, retirement plan payments are reporting to the investment firm. Note that retirement plans typically include both a worker and an employer contribution amount.
- Withholding payments: All of the tax and benefit payments must be forwarded to the taxing authorities, retirement plan firms, and to any other benefits providers.
Keep in mind that your business must address changes to payroll, which complicates the process and requires more time. Every year, employees may be added, promoted, or let go. Workers may also change their tax and benefit withholdings, based on salary changes or family changes.
Your payroll data is a constantly changing, and that’s an issue you have to manage.
Start your payroll evaluation by documenting your current process in a procedures manual, if you haven’t already. The manual documents how to perform routine tasks, and you should include each task you perform and who is responsible for task completion.
Kim owns and operates Elegant Catering, which provides high-end catering services to corporations and individuals. The catering business operates with three full-time employees who cook and prepare food, and four independent contractors who deliver food and serve at catering events.
After considering her current customer base and her marketing plans, Kim estimates that her sales grew by 20% in 2019. She plans on hiring more workers to handle the growth.
To process payroll, Kim records gross pay, all withholdings and net pay in a spreadsheet. Each payroll period, she posts the company’s payroll expense and other data into accounting software and sends the data to her accountant.
The accounting firm creates all of Kim’s withholding reports, which Kim uses when she sends payments to each entity. At the end of each year, the accounting firm prepares the tax return, along with the employee W-2s and independent contractor 1099 forms.
After the accountant reviews her spreadsheet work each pay period, Kim pays the staff.
Changing your payroll process is a big deal, and it will require time and effort to make the change and possibly train your staff on the new procedure. Here are some key factors to consider:
Key Factors to Consider
- Errors: Are you making errors? If so, how much time are you spending to correct them? Even with a small staff, Kim makes an error in her spreadsheet 4-5 times a year. Fortunately, the accountant reviews her spreadsheet for accuracy and notifies Kim before any payroll is processed. Each error requires about 30 minutes of Kim’s time to correct.
- Delegation: Because of the sensitive nature of payroll data, Kim believes that she must keep responsibility for creating the Excel document each payroll period. She’s decided that delegation isn’t appropriate, using the current system.
- Employees vs. contractors: Independent contractors are paid their gross pay without tax or benefit withholdings, and adding contractors to payroll is less complicated. Kim, however, hired both employees and contractors during 2019, so she will have to deal with withholding issues for new employees.
Kim discusses these issues with her accountant, and with several peers who manage local catering companies. She concludes that her current system can’t handle company growth, due to an increased error rate, a lack of delegation on Kim’s part, and the added complexity of hiring more full-time workers.
You need to perform this same analysis for your business. Is your current process sustainable as you grow? If you’re struggling with managing payroll for five people, how much time will you personally spend with a staff of 20?
Reach out to other people who can help you with this decision.
More Accounting Support
One payroll option is to get more help from an accountant.
For example, Kim decides to send payroll information on wages and withholding amount to her accountant, who will calculate net pay. She also invests in software that allows her accountant to enter the net pay amounts, send payments to employee checking accounts, and to generate physical checks for payroll, as needed.
When the process is complete, the accountant sends a report that documents the net amounts paid by worker, and the total net pay coming out of Kim’s business account. The accountant handles the sensitive payroll information, rather than someone in Kim’s business.
Improving Your In-House System
Many small business owners prefer to keep payroll in-house rather than through an accountant, there are do-it-yourself and do-it-for you payroll software options out there that calculate deductions, withholding, and tax payments. An outsourced full-service payroll that pays and files state and federal taxes on your behalf is another good option that takes the workload off your busy schedule.
Change is Hard
Change is difficult, but often necessary.
If you don’t improve your business procedures, you may not be able to manage growth. Ask for help, and make the decision to change your payroll process, so you can increase sales and profits.
You got this!