7 tips for managing small business payroll processing - POS terminal on a counter

7 tips for small business payroll processing

Thursday, December 09, 2021

As a small business owner, you need to constantly keep a close eye on your money. This will help ensure that you can buy more products, cover payroll, and ultimately grow your company. And one area where your business could benefit is from your payroll processing system. Let’s look at why.

Without the right payroll system, you and your employees might be spending more time than necessary on payroll management and other expenses associated with payroll. Also, you need to ensure that you pay your employees on time and accurately, and that the associated taxes and deductions are correct.

It helps to have a fully-staffed and knowledgeable human resources department to handle your payroll services, but you need to make sure when you run payroll that you're handling it in the least time-consuming way possible while at the same time the most accurate. This article provides seven tips for managing your company's payroll processing to help you become successful as a small business owner. But first, let’s look at what payroll processing is.

What Is payroll processing? 

Payroll processing encompasses the entire process of ultimately getting your employees their paychecks. This includes calculating their pay based on their hourly or salary rate, federal income tax, state tax (if applicable), retirement and health insurance deductions, and more. The payroll schedule must be consistently met on time and the paychecks must be accurate; and in order to achieve this, you need to have a robust payroll processing system in place. 

Why Is payroll processing important for a small business? 

Payroll processing covers a lot of ground and a lot of paperwork, from tax forms to wage garnishments. Plus, ensuring that your team is paid on time and accurately is a great step toward making employees happy and keeping them around. 

Here's a look at a few other things to consider regarding the importance of payroll processing for your small business:

Errors can financially impact a small business

If there are any errors in your payroll processing, there's almost always a financial penalty. For example, if your tax withholdings or FICA amounts are wrong, you could face penalties plus interest from the IRS. If you’re late filing 1099 forms to your independent contractors and the IRS, you could face additional penalties and fines. You as a small business owner need to be cognizant of all timecards, time tracking, and due dates that, if not followed correctly, can lead to fines as well as employee discouragement. 
 

Processing payroll properly is essential for a business

Processing payroll is more than ensuring an employee's paycheck arrives in their bank account on schedule. You need to keep excellent payroll and financial records and close each pay period on time. Even with payroll software, processing payroll can be challenging; but if you want your small business to thrive, you have to master it.

Let’s look at 7 tips to assist you and your small business achieve effective payroll processing.
 

7 tips for effectively managing payroll processing at your small business

From payroll taxes and employees' wages to timekeeping and payroll deductions, it seems like the payroll process becomes more complex each payroll period. So here are seven tips that can help make the entire payroll process a little easier for you and your small business. 

1. Register and maintain an employer identification number

An employee identification number (EIN) for a business is similar to a social security number for an individual, and you must have one. In order to get one, you need to go through a registration process. Here are some things to consider regarding EINs:

A way to identify your small business for tax purposes

When you make tax payments for your business, the IRS and state tax authorities need a way to identify your account, and the EIN serves as the way to identify your small business. Also, your employees will use this number on their W-2 forms when they file their tax returns. Your EIN needs to appear on all of your tax forms and in your recordkeeping so that tax authorities and auditors can quickly access your account. 

Required to open business bank accounts

Depending on the type of business you have, you may be required to have an EIN to open a business checking or savings account. 
 

2. Properly classify all workers and gather necessary documents

As part of the onboarding process with new hires, you need to ensure that the new employees fill out the necessary paperwork and provide the required documents such as completed W-4 forms, payroll information, social security cards, and more. 

Check with the IRS about employee classifications

You need to know what employee classifications your new hires fall under to ensure proper classification.
There are three common employee classifications:
  • Salaried employees
  • Hourly employees
  • Independent contractors

It's essential that you check with the IRS guidelines to verify employee classifications and that you have each employee classified correctly. You can face a host of fines and penalties if you have an employee misclassified. 

Categorize employees as salaried or hourly

When you have employees on your payroll, it's essential that you categorize them as either salaried or hourly. With salaried employees, they get paid for 40 hours per week even if they work overtime or miss a few hours, depending on state laws. An hourly employee has a specific hourly pay rate, and timekeeping is essential because they get paid overtime if they go over 40 hours in a workweek. 

Collect all required tax documents from your employees

You need to keep a copy of your employees’ Form W-4 on file in case you're ever audited by the IRS or state tax authorities. Good recordkeeping will make a potential audit go smoother. 
Begin collecting employee information at the time of hire
When you're onboarding a new employee, it's essential to collect all required documents at that time. This includes the forms of identification required to prove citizenship, such as a driver's license and social security card. They also need to fill out their W-4 for tax withholdings. 

3. Understand and follow required wage laws

There are federal minimum wage laws as well as other laws that govern overtime pay. These laws vary by state and city. New laws are created each year and existing laws may change annually that affect the wages you're required to pay to your staff. As a part of managing payroll, you need to keep up with all of these changes. 

Know what your legal and financial obligations are as an employer

As a small business owner, you have a legal and financial obligation to your employees, such as maintaining unemployment tax and workers' compensation insurance. These obligations can change, and you need to make adjustments when necessary. This is especially true when it comes to processing payroll and ensuring your staff gets their paychecks on payday in the correct amount

4. Set and follow a budget

Yes, you can set a budget for payroll. This budget should include everything from the cost of payroll software to the wages paid and benefits given to your employees. You also need to budget for payroll taxes and unemployment taxes. When you have a budget in place, it's easier to create an employee work schedule and the short- and long-term goals you want to achieve for your business.
 

Determine the payment method and schedule you would like to follow

Are you offering your employees direct deposit, or do you want to deal with paper checks only? You also need to know how often you want to pay employees. Many companies have begun paying their employees bi-weekly because it cuts down on the expense of processing payroll, especially if the company is outsourcing the payroll processing duties. 

Should include required wages that must be paid as well as state and federal payroll taxes

The bulk of your budget will be taken up by paying your employees along with state and federal taxes. In fact, wages should be at the top of your budget, followed closely by payroll taxes so that you don't find yourself faced with fines, penalties, and interest for not making payments on time. 
 

5. Determine your preferred payroll system

It might take a little trial and error, but you need to find your preferred payroll system and stick with it. You can spend a lot of money and time trying out new ways to process payroll, and each time the integration of new payroll software takes time and money. It is essential that you find the payroll system that works best for your small business and stay with it. 
 

Could be manual, outsourced, or completed with software

There are several ways to handle your payroll. If bookkeeping is your thing, then you might use paper time cards and handle payroll manually. If your budget allows, outsourcing or payroll software are better options for accurate and on-time payroll processing. 

Document system and payroll policies in the employee handbook

When you know the kind of payroll system you want to use, it's a good idea to offer transparency to your staff by documenting the payroll system and policies in the employee handbook. This can reduce employee questions directed to your human resources department and ensures everyone knows their responsibilities, like time tracking and submitting their timecards in a timely manner. 
 

6. Perform regular payroll audits

Errors in payroll processing can be costly, which makes payroll audits a must. While the payroll processing system you have in place today might work seamlessly, the addition of new hires, terminated employees, and changes in health care benefits and tax laws can result in miscalculations or incorrect information due to human error. Regular payroll audits can ensure your payroll processing is up to date and performing correctly. 
 

Ensure compliance with state and federal regulations

State, federal, and local laws can change often. In fact, it seems like each year there are new tax laws on all levels. Also, the laws governing wages and pay rates can change, too. Frequent payroll audits ensure that your small business is always compliant with the most current regulations. 

Confirm pay rates for all employees

It's easy to have a typo in pay rates, which might cause you to under or overpay an employee. Also, if you give routine raises to your employees, you might forget to enter one, thereby causing payroll errors. An audit provides you the time to double-check and confirm the pay rates of all your team members. 

Confirm tax rates are correct

If you make a mistake in payroll tax rates and it goes unchecked, your small business might be faced with substantial fines and penalties from the IRS and state tax authorities. With routine audits, you can correct any mistakes quickly and avoid any financial repercussions for your small business. 

Maintain employee and payroll records

It's essential that your recordkeeping is on target. You want to keep time cards for all of your active employees for a minimum of two years in case of an audit. Also, you need to maintain payroll information regarding pay, such as paycheck amount and the method of payment, for at least three years. 
 

7. Get help to manage the complexities of payroll calculations, management, and compliance

A successful small business owner is always willing to turn to an expert when they need help. Processing payroll is a complex process, and you need payroll management that helps you remain compliant with regulations and gets your staff paid accurately and on time each pay period. 

Payroll processing is one of the most important tasks a small business owner needs to handle. From payroll taxes to correct pay rates, the payroll process is complex. You need to be on top of your game to handle it correctly, and the 7 tips listed in this article should help you.

Ready to revolutionize your small business payroll processing?

Heartland is the point of sale, payments, and payroll solution of choice for small businesses that need human-centered technology to sell more, keep customers coming back, and spend less time in the back office. More than 750,000 businesses trust Heartland to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.