Payroll is a major component of any business. This is especially true as your business grows and takes on more employees.
There are also a lot of details that can make payroll a complicated process. You need to decide how often you’ll pay your employees, how to classify your staff, and whether they’ll be salaried or paid hourly. But, that’s just the tip of the iceberg.
Managing your payroll can be time-consuming. Though, there are ways to simplify the process.
By paying attention to some of the do’s and don’ts of payroll for small businesses, you can learn how to avoid the most common payroll mistakes while also creating a detailed payroll plan.
Payroll is a necessary part of running your small business. Don’t let it keep your business from growing. Keep reading to learn the payroll do’s and don’ts for small businesses.
Create a Payroll Budget
The very first step in handling your payroll is setting a payroll budget. Your payroll budget should include a budget for both taxes and wages.
To set a budget, you’ll need to look at your monthly and annual sales volume, the size of your staff, and expected profit margins. These details can vary depending on the industry of which you are a part.
As part of your payroll budget, there are a few details to consider. This includes the categorization of your employees and the schedule for submitting payroll.
Here is a quick look at the main steps needed to set a payroll budget:
- Total the number of employees in your payroll budget
- Set pay grades for each category of employee or position
- Determine the median pay grade or salary for each position
- Include estimates for attrition – typically about 2 to 3 percent
- Determine your budget cap for yearly salary increases
- Determine the cost of employee benefits
Those are some of the primary factors that go into a detailed payroll budget. But, there is still more to explore.
Don’t Misclassify Your Employees
As mentioned, when setting your payroll budget, you’ll need to set pay grades for each position. Though, you also need to ensure that you’re properly classifying your employees.
There are three main classifications – salaried employees, hourly employees, and independent contractors. The biggest issue is categorizing hourly employees as independent contractors. This can result in missed overtime or pay that is less than the minimum wage.
There are pros and cons to categorizing an employee as an independent contractor. But, they need to fit the description of an independent contractor.
An independent contractor typically performs work on an occasional basis. They often work independently and supply their own materials.
Failing to properly classify your employees could result in problems with the IRS. In fact, you could end up having to pay back taxes, including unemployment taxes and FICA.
Create a Payroll Schedule
The next component of your payroll planning is setting a schedule. The most common pay periods are weekly, biweekly, semi-monthly, and monthly.
Increased frequency results in more processing time, payroll costs, and increases the severity of payroll errors. Therefore, monthly payroll schedules result in the lowest payroll processing costs.
Of course, monthly pay schedules are less common and could make it more difficult to attract top talent for your small business.
Don’t Calculate Overtime Every 2 Weeks
Some small businesses make the mistake of calculating overtime every two weeks. Instead, you’re supposed to calculate overtime every week.
The Department of Labor (DOL) defines the workweek as 40 hours. Any employee that works more than 40 hours in a workweek should receive a rate not less than 1.5 times their regular pay.
The DOL recently made changes to the overtime rule, which could impact your requirements for paying overtime to employees. According to the Fair Labor Standards Act (FLSA), previously exempt employees may now be considered nonexempt.
With these changes, the salary threshold for requiring overtime pay has changed. Now, workers that earn less than $47,476 per year should receive overtime for hours worked beyond 40 hours in a workweek.
This salary threshold is expected to increase every three years. The next increase should occur on January 1st, 2020, with the threshold reaching $51,000.
Determine if You Require an Employer ID Number
Most businesses will need an employer ID number (EIN) to file taxes, including payroll taxes. If you don’t already have an employer ID number, then you’ll need to obtain one from the IRS.
The application process for obtaining an EIN is simple. Any business located in the US or US territories can apply. You also need a valid social security number. After submitting your application, you should receive your EIN immediately.
How do you know if you need a tax ID for your small business? The only situation where you won’t need an EIN is if you don’t have any employees and operate a sole proprietorship or an LLC. With these conditions, you will use your social security number.
Also, if your business undergoes certain changes in the structure, you may need to get a new EIN. For example, if your business changes from a sole proprietorship to a partnership or a corporation, you’ll need a new EIN.
Don’t Submit Payroll Without Double-Checking Time Cards
If you have hourly employees, you should double-check the time cards when entering data into your payroll system.
Depending on the time and attendance system that you use, employees may occasionally make mistakes. These mistakes might include forgetting to clock in or out at the beginning or the end of a shift. These issues can result in underpayment.
Even if the employee made the mistake, it is still the employer's responsibility to ensure accurate pay for every employee.
Along with double-checking for these errors to ensure proper pay, you also need to remember to include pay for mobile employees. This could include travel time and reimbursement for gas.
Use Quality Payroll Software
If you plan on handling your own payroll, then make sure that you use quality payroll software. The right software can be useful when double-checking time cards or when entering payroll data.
Relying on spreadsheets or manual entry increases the risk of payroll errors. If these errors aren’t caught, they could create a major problem down the road.
Quality payroll software simplifies the process. Many of these programs can be implemented as part of your existing time and attendance system, automatically transmitting hours worked as soon as an employee clocks in or out.
There are also payroll programs that will automatically take care of taxes. This includes both state and federal taxes. Payroll tax deposits need to be submitted on time, and payroll software can help with this step.
Don’t Forget to File Tax Forms on Time
As mentioned, you have payroll tax deposits and tax forms that need to be filed regularly. Though, the dates for state taxes may be different in certain states. Either way, you need to remember to file these tax forms on time to avoid penalties.
Employment tax deposits for federal taxes need to be made either semi-weekly or monthly. These deposits need to be made electronically.
If you tend to have difficulty getting these taxes in on time, then outsourcing your payroll may be the smartest solution.
Outsource Your Payroll or Bookkeeping
It’s estimated that about 60% of small businesses deal with payroll internally – either with a dedicated payroll department or through the human resources department.
While you might think that in-house payroll could save time and money, you’re more likely to end up with costly payroll errors. That’s why having an organized payroll process could save you a headache later.
Or, you could outsource your payroll process to a third-party, such as a certified public accountant. Allowing a CPA to manage your payroll can help prevent payroll mistakes.
The average small business owner spends several hours per month dealing with payroll. Working with a CPA or bookkeeping professional can help free up this time.
According to the IRS the average small business with 10 employees will spend about $2,600 per year on payroll processing. Another $845 in IRS penalties comes from incorrect filings or late tax payments.
Not only does outsourcing your payroll simplify the entire payroll process, but it also provides you with several useful options.
For example, working with a CPA makes it easier to institute direct deposit for your employees. And, you don’t have to worry about keeping your payroll software up to date.
While outsourcing isn’t always necessary, it can be a major help to your growing business. You won’t need to deal with some of the do’s and don’ts discussed. Instead, a qualified bookkeeper will keep your payroll running smoothly.
As we’ve discussed throughout this article, there are plenty of things you should and shouldn’t do when it comes to managing the payroll for your small business.
By examining the ins and outs of payroll, you will be better equipped to manage your business’s finances in a manner that benefits everyone while also minimizing mistakes that lead to payroll problems.
Keep these tips in mind to stay on top of your payroll and use these do’s and don’ts to take the hassle out of managing payroll – or contact a CPA.
If you’ve got any questions or suggestions related to payroll, please share your thoughts below in the comment section.