Payroll is a complex process that must be managed carefully to comply with federal and state laws. You must calculate employee gross wages, determine and record deductions, report taxes to the government, and distribute payroll checks.
You can learn how to do payroll, hire an accountant, or use online software to handle the process. Here are several strategies on how to do payroll yourself for your small business.
Know Your Limits
Managing payroll is difficult and time-consuming. It includes calculating gross pay, employer taxes and deductions, and employee net pay. It also includes tracking employees' hourly or salaried hours and timely distribution of paychecks and tax reports. It's also essential to ensure all calculations are done correctly – and if not, the consequences can be severe.
Knowing your limits is essential if you're thinking of doing payroll by hand. Running payroll by hand is stressful and time-consuming and can also be dangerous if you don't handle your taxes correctly. In addition, mistakes can cost you hefty penalties and interest.
One option is to hire a payroll service. These companies will pay a fee for your employee's wages, taxes, and filings. Many even provide internet access for your staff so they may manage their timekeeping and payouts. If processing payroll takes more time or expertise, this is a great choice.
Know Your Taxes
It's easy to be tripped up if you need to familiarize yourself with the payroll procedure. Errors can be made at any step, from miscalculating employee hours and wages to forgetting health care deductions or incorrectly withholding taxes. The IRS will hit you with hefty fines if you make a mistake. Additionally, running payroll can be time-consuming, especially if employees are on different pay schedules (e.g., biweekly or weekly).
Running payroll involves more than just writing checks; it requires calculating an employee's gross pay, subtracting appropriate taxes and deductions, and then delivering the remaining amount, called net pay. In addition, employers must submit federal and state payroll tax deposits every month and file employment tax returns and employee W-2s at the end of each year. Many small business owners attempt to save money by doing payroll rather than utilizing software, but it's almost always a mistake that costs you in penalties. Similarly, some owners try to avoid paying taxes by misclassifying independent contractors as employees, but this is illegal and can cost you even more in fines later on.
Know Your Employees
Payroll is one of the most recurring expenses for any small business. Therefore, it's essential to manage it effectively to ensure you have enough working capital each payroll period to pay your employees, cover any state and federal payroll taxes, and maintain a healthy cash flow for your business.
To process payroll, you'll need information about each employee, including their hours worked, wages, tax status and exemptions (like federal allowances), and other deductions such as retirement contributions, health insurance, and workers' compensation. Understanding how to calculate each employee's gross and net pay is also essential.
Knowing your employees is especially important if you're trying to process payroll independently. Determining net pay by hand takes hours, and mistakes can be costly for your business. You can use online payroll software or work with an accountant to do the calculations, but both options will cost you. The key is to decide what's best for your business.
Know Your Software
Payroll is one of the most important human resources tasks for small businesses. Getting it right is critical; even minor errors like forgetting to deduct health care can add up. In addition, mistakes can be costly in terms of IRS penalties.
Properly managing payroll processes starts with collecting the necessary information to feed into a payroll system (or software program). Next, you must register your business as an employer and establish state and local tax ID numbers. Setting up a separate bank account for payroll transactions is also good. Finally, you'll want to keep up with filing deadlines like W-2 and 1099 forms.
Alternatively, you can use a payroll service to handle your business's payroll needs for a fee. Many small enterprises go this method. However, remember that these services can be costly, especially if you have more than one staff. They also may not file taxes or local forms for you, and they often offer a steep learning curve.
Know Your Payroll Schedule
The payroll schedule is the recurring time frame during which employees' work hours are tracked, paid, and recorded. Small businesses can follow a monthly, biweekly, semimonthly, or weekly payroll schedule. Each schedule has pros and cons, which should be based on the company's cash flow needs, industry standards, employee preferences, and state laws.
For example, a weekly payroll schedule is ideal for hourly workers or contractors whose hours vary weekly. It also allows companies to match payroll expenses to the business's revenue in real-time. However, it requires that a business run payroll 52 times a year, which can increase processing fees with some payroll services.
Small businesses should also consider whether they have a mix of salaried and hourly employees when choosing a payroll schedule. Salaried employees prefer monthly payments, while hourly staff may want to be paid more frequently. Using payroll software with flexible scheduling options makes it easier to combine hourly and salaried pay arrangements into one schedule.