How do you manage payroll?
What’s a Payroll?
Payroll is the process that companies go through to compensate everyone working for them. However, payroll isn’t as simple as just disbursing cash to a set of people. There are several components and parts in a payroll.
Your payroll system needs to be able to calculate and distribute the salary of every employee. On top of that, you also need to provide financial records to your employees with a breakdown of salary, tax, bonus, overtime pay, and holiday pays. This system will also be the one to check the attendance of your employees.
How To Manage Your Payroll Efficiently?
Now that you know the nature of payroll, here are some ways on how to efficiently manage your payroll.
For most small business owners, doing payroll is one of the most confusing, tedious and time-consuming business activities—but it’s also one of the most necessary ones! Problems can lower employee morale, tie up crucial company resources and run even the most successful business into the ground.
Here are six payroll tips that will help make payroll easier, more accurate and less of a hassle:
Register for an Employer Identification Number
Before you can start putting employees on payroll, you will need an Employer Identification Number (EIN). Just like your Social Security number (SSN) is to you as an individual, your EIN is a way to identify your small business for tax purposes.
Most, but not all, small business owners need to get an EIN before they can apply for licenses, file payroll taxes or even open a bank account. Depending on where your business is based, you may need to get a state-level EIN on top of your federal EIN.
Decide on Pay Schedule and Salary Status
Pay frequency and wage status are two of the key decisions you have to make as a small business owner. Let’s break that down:
- Pay frequency, also known as pay schedule, is when you pay your employees and how often they get paid. Check federal and state laws to ensure that you are meeting your area’s minimum payday laws. The most common payroll schedules include weekly, bi-weekly and monthly payments. No matter what you pick, keep it consistent and pay on time.
- Salary status is how wages are computed. You can choose between paying an hourly rate (nonexempt employees) or paying a salary (exempt employees). The right salary status is largely based on the individual needs of your small business as well as the employee’s position.
Understand and Abide by Wage Laws
No matter what, your business or company must be compliant with both federal and state laws. This means that you (or someone in your company) needs to understand what your legal and financial obligations are as an employer.
Make sure that you’re paying the right employment taxes/Federal Insurance Contributions Act (FICA) taxes (i.e., Social Security and Medicare), the right local and state tax, and the right income tax per employee. Double-check your payroll process to ensure that every employee gets paid accurately and on schedule. Monitor your payroll tax deposits to ensure they keep to a regular schedule according to your tax liability.
Set up a Payroll System
A payroll system is any kind of system that helps you calculate and manage your employees’ paychecks. Generally, you have three options:
- Manual: Some small businesses choose to do payroll by hand, mostly because of the cost savings. However, manual payroll is the most tedious and time-consuming, as well as the most prone to errors.
- Outsourced: If you have the cash to spare, you can hire someone else to do your payroll for you. They will usually handle everything, from processing paychecks to handling tax deposits, payroll taxes, employment taxes, etc.
- Software: Payroll software combines the best of both worlds—the cost-effectiveness and control of manual with the time-savings, accuracy and convenience of outsourced. Plus, most software today have comprehensive features, offering everything from storing information to calculating payroll tax and beyond. For example, Gusto is a FreshBooks integration that imports your payroll transactions automatically. It can help you make more accurate records without compromising speed.
When choosing the right payroll system for your business, it’s important to weigh several factors before making a decision. Always consider the following:
- Budget: How much are you willing to spend on your payroll system? If you have a tight budget, then outsourcing your payroll is most likely out of the question. Keep in mind, however, that your time is valuable—it might be more cost-effective in the long run to spend a little more on your payroll.
- Number of employees: Payroll is a lot easier for businesses with only a few employees. If doing payroll manually only takes you a couple of hours a week, then perhaps your system is working for you. The bigger and more complex your company, the more you’ll need some outside help.
- Confidence: Do you have an accounting or HR background? How confident are you in your accuracy and payroll management skills? If the answer is “not very,” consider outsourcing the task or letting professional payroll software do it for you.
Outline Your Payroll Policy and Processes
Before running your first payroll, it’s important to establish a standard payroll policy. This ensures that everyone from management to HR to your employees is on the same page about how payroll works, when the payroll period is, how much they can expect to take home, and how benefits (leave, overtime, etc.) are paid.
Use a Time-Tracking System
A timekeeping system is a great way to manage your employees’ productivity and calculate their wages, especially if you’re paying hourly rates. It’s important to have a time-tracking system that’s both easy to use but difficult to manipulate. There are many different time sheet solutions, including systems that integrate right into your payroll system for even more accurate information across the board.
Organization is essential when you’re hoping to maximize your payroll efficiency. When your payroll processing documentation is arranged in an orderly fashion, your tasks become much easier to complete in short order.
Your business also needs to be organized to avoid missing important dates. A payroll calendar could help you keep track of important dates, such as when you must remit payroll taxes or when certain forms are due.
Not only will this remind you of your deadlines, it also provides a visual reminder of when tasks need to be completed to meet those deadlines. With a calendar, you can plan your time more effectively and limit stress related to payroll tasks.
Choose a consistent pay period, such as weekly, biweekly, semimonthly or monthly. Examine your state’s minimum payday laws; you may pay more often than the law requires but not less frequently.
Your payroll system enables you to process paychecks. If you process payroll in-house, using payroll software is more efficient than processing the entire payroll by hand. The software vendor generally has packages based on the size of your business. To save on time and money, you might outsource your payroll duties to a payroll service company. The provider processes paychecks and often handles your company’s payroll tax and benefits obligations. All you have to do is double-check the provider’s work.
To track your employees’ work hours, you may have workers fill out weekly time sheets or install a time clock. The latter is more efficient than the former because it’s not as easy for employees to fabricate time clock hours. Depending on what kind of time clock you have, you either calculate the punches shown on the time card, or the system performs the calculations for you.
While doing payroll, you must withhold federal payroll taxes, including Social Security and Medicare, from your employees’ paychecks and pay your own share to the proper government agencies. You also withdraw federal income taxes, state income taxes — where applicable — and unemployment insurance contributions. For federal income tax withholding purposes, give your new employees a W-4 form to complete and return to you in time for their first paychecks. To stay on top of your federal tax obligations, consult Internal Revenue Service Circular E, “The Employer’s Tax Guide.” To determine your state and local liabilities, contact your state revenue agency or local tax assessor.
If you provide your employees with company benefits, such as health insurance, flexible spending accounts and retirement plans, the employee’s voluntary contributions to such plans are also handled by payroll. Your payroll or human resources staff may handle this area of your business, or you can hire a third party administrator. If you offer paid time off, such as bereavement, vacation, sick days and personal days, your payroll administrator can keep track of what’s being used.
The more paychecks you generate, you more checks you must track. Paychecks are susceptible to theft or misplacement. If this happens, issue a stop payment on the stolen or lost check and reissue another paycheck to the employee. You can avoid this possibility by establishing direct deposit with your bank and using payroll software that enables this option. Explain the advantages of direct deposit to your employees and encourage them to accept it.
Payroll accounting is how you monitor the company’s payroll expenses. Through payroll accounting, you allocate wages, salaries, paycheck deductions and other expenses to the correct financial accounts. You also perform periodic reconciliation to ensure accurate paychecks, tax reporting and accounting.
The federal and state governments have specific record-keeping laws for payroll. Although payroll software stores your payroll data, you can increase reliability by printing payroll reports at the end of each pay period and filing the hard copies in a secure area. The reports break down each employee’s gross-to-net wages for the pay period.