Payroll Best Practices For Small Businesses

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There’s no denying that managing payroll for an SME is challenging. Even if you only have a few employees, staying on top of the paperwork and compliance can chew up a significant chunk of your time. Per recent survey, 30% of small business owners in the US spend over 6 hours per month on various payroll tasks.

As an SME, there’s a good chance that you don’t have a team member whose sole function is payroll. The job either falls to you, the business owner, or another team member adds it to their list of duties.

To avoid wasting more time that you need to on all the payroll chores, you need a quick strategy and some tools to help you speed up the process. This post offers a quick how-to on doing payroll.

But before we dive in, let’s make sure we are on the same page term-wise.

What is Payroll?

Payroll can mean a few different things depending on the context.

Technically, payroll refers to the list of employees that work for your company. However, it can also refer to the collection of records relating to payments you make to your employers including wages, salaries, tips, bonuses, taxes, and other withholdings.

Payroll is also the process of calculating the amount of money to be paid to employees, withheld for taxes, directed to benefits payments, etc.

As you can see, payroll is kind of a “big deal” function of any business. It has an impact on your overall net income. It also plays a role in whether or not your are compliant with the law. Further, your ability to pay your employees correctly can seriously impact your ability to recruit and retain good talent. There are few things that will trigger a negative reaction from employees more than failing to pay them correctly.

Even potential investors will want to be assured that you are meeting your payroll obligations. This can be as meaningful to them as your profit margins. It’s a sign that your business is healthy (or not).

How to Do Payroll: 7 Quick Tips

Small team or large, payroll can be complex. You’ve got to make sure that everyone is paid on time, that the correct deductions are taken out, and that your record keeping is impeccable.

To keep you on the right track, we’ve provided seven helpful tips.

1. Establish And Maintain Clear Communication About Your Payroll

There are two primary reasons to make sure that you communicate with your employees clearly about the payments they receive from you.

First, it’s the right thing to do. Your employees deserve to know when they will be paid and how much. There should be full transparency in the process.

Further, if there are any issues, you should feel absolutely obligated to communicate those proactively. Payroll mistakes are serious, but you can salvage morale through honesty and ensuring your employees that you are working hard to fix any issues.

Here are some steps you can take to facilitate this communication:

  • Educate employees about payroll as part of the on-boarding process.
  • Provide employees with a contact person, email address, and phone number for payroll questions and complaints (for instance, if you are outsourcing it to an accountant).
  • Document the payroll process including payroll dates and deductibles.
  • Communicate any changes in advance.
  • Educate employees about the ‘anatomy’ of their payroll statement.
  • Offer assistance in completing W2 or other forms.
  • Make information accessible through online documentation.
  • Offer an annual statement that details the amount paid out in total for benefits, wages, and salaries.

2. Make Sure Each Employee is Classified Correctly

Does this employee qualify for insurance coverage? What about overtime? Do you need to deduct taxes for that employee, or are they responsible for handling their own payments to the government?

The answers to these questions depend on your classification of each of your employees.

Your payroll obligations vary depending on how each employee is classified. Temporary employees, independent contractors, vendors, temporary employees, full-time staff, and part-time staff all have different needs and requirements when it comes to payroll. Classify them correctly to ensure that your deductions, pay, and end of year filing are accurate. It’s important that you make it easy for them to communicate any changes that could impact this too.

3. Conduct Frequent Audits

You should conduct audits of your payroll process, records, and any technologies you are using. First, you want to ensure that you catch any errors or inconsistencies. You also want to be certain that the technology you have chosen is still working for you. For example, Intuit payroll might be a workable solution now, but as you grow you may find that ADP payroll is a better fit.

4. Know Your Deadlines

You’ll have to keep track of several important deadlines throughout the year. For example, even though most people file taxes annually, you will have to pay the payroll taxes you deduct to the state and federal government throughout the year. When you miss one of these important deadlines, you could be hit with some very steep penalties. That’s not something a small business owner needs to deal with.

Be prepared. If your payroll software doesn’t handle things for you automatically, create calendar entries and set reminders well in advance of upcoming dates.

5. Use Technology to Your Advantage

If you’ve been handling your payroll manually, you might consider automating as your business grows.

Not only you save yourself time, but payroll tools are also more convenient for your employees. With a manual system, your employees might have to dig through paper copies to find information they need, or wait for you to provide them with the data they request. Tasks such as requesting time off or making changes to deductions are so much easier when they are automated.

Finally, there’s built in auditing and reporting. You’ll spend less time focusing on payroll, and more time on mission critical tasks.

If you think that payroll software is out of your budget, take a second look. You may be able to find free payroll tools. Just know that this option is usually limited to companies with a small number of employees.

If that’s not an option, use other technologies to help you stay on top of things. A good financials package, spreadsheets, and calendars can go a long way towards making a manual, payroll system easier to manage.

6. Maintain Excellent Records and Keep Them

Record keeping is key. If there are ever any questions or accusations, your ability to bring up accurate records of all payroll transact is key. This need could arise from an employee complaint, audit, or other circumstances. Your employees also count on you keeping impeccable records.

7. Set up Direct Deposit

Paper checks are passe. They’re inconvenient, can get lost, and are relatively easy to forge. Employees who get paid by check must wait for the bank to open to cash or deposit their checks. By using direct deposit, you can ensure that your employees get paid as early as possible.

If you have unbanked employees, you can still use direct deposit. There are options that allow you to place your employee’s paycheck onto debit cards that they can use in stores, at ATMs, and elsewhere.

Finally, when working with contractors ask them to submit their invoices on time too, so that you can process them in a timely manner and make payments. Again, talk through the different payment options that work best for both of you.

How to Calculate Payroll Taxes The Easy Way

Managing payroll is part of the deal. You’ll also have to deal with taxes. Are you deducting the correct amount of taxes from your employees’ paychecks? If not, that can spell trouble for you and your workers.

Here are some tips to help you stay on top of things.

  • Use a payroll package to take the guesswork and calculations out of the picture entirely.
  • Make sure that you have access to the most up to date tax tables so that you can calculate deductions correctly.
  • Learn what counts as a before or after tax deduction.

Now, follow these basic steps to calculate payroll taxes. Keep in mind that these guidelines are quite simple. Most tax situations are more complex.

  1. Calculate Withholdings For Each Employee
  2. Use The IRS Withholding Chart as a Guide
  3. Calculate Social Security And Medicare Withholding
  4. Calculate Other Before Tax Withholdings
  5. Estimate After Tax Deductions

Handy Payroll Apps

Your safest, most convenient option is to find a payroll, software package that works for your organization. Fortunately, you can find one that will work with most budgets and business types. Here’s a brief list of payroll apps for SMEs that are reputable, and easy to use.

Do your research before you make a final choice. Take advantage of any opportunity to use a free trial. Finally, pay attention to subscription and license fees. You may be able to save a significant amount of money if you purchase a longer term license for the software you choose.

Healthy organizations get payroll right from day one. They ensure that their workers are paid on time, and that they are paid accurately. They stay in compliance with payroll rules and regulations as well. Producing necessary records on demand isn’t a problem for them. And they maintain transparency as well.

Photo by Oliver Klein

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