Whether you just opened your doors or you have been operating for decades, as a small business owner, you might be overlooking important details when managing your payroll. These oversights can lead to higher employee turnover, stressful inefficiencies or costly non-compliance penalties.
Payroll is about more than calculating hours and issuing checks at the end of the pay period. It’s a complex system of payments, tax withholdings and on-time reporting. Small errors can result in major consequences if not caught and corrected early.
It’s easy for small businesses to overlook the importance of payroll in the hustle and bustle of daily operations. Review these payroll basics to make sure that your company’s payroll process is helping your business, rather than hindering your success.
Create a system that enables accurate and timely payments and reporting.
Don’t put your payroll off until the last minute. Rushing your payroll process opens the door to incorrect employee information that irritates your staff or reporting errors that can lead to serious penalties. If your business has an ad hoc system of handing payroll every pay period, you place undue burden on your bookkeeper or HR staff, who are tasked with managing information where details are incredibly important.
Take the time to establish and document a thoughtful payroll system that sets clear dates and deadlines for collecting and submitting payroll information with enough time to review the following pieces of essential information:
- Employee name, SSN, address
- Appropriate classification (W-2 employee or 1099 independent contractor)
- Accuracy of tax withholdings
When you have this system in place, make sure you adhere to it. Iron out details as you go but hold your payroll processing staff accountable to remain proactive. If you find that payroll processing is occupying an inordinate amount of time for your in-house staff, consider partnering with a reputable payroll services provider who will handle all payroll processing on your behalf.
Know your complete payroll scope and plan your budget accordingly.
Payroll is more than just wages. It involves taxes, Social Security, Medicare and federal unemployment tax that represent a percentage of each employee’s wage. Federal Social Security and Medicare requirements alone stipulate that you match the amount withheld from your employee’s pay, which amounts to 7.65% of gross pay. Make sure you evaluate the true cost of your payroll so you are not forced to dip into company savings to cover these requisite payroll expenses.
It is critically important to classify your employees correctly.
One of the fastest ways to arouse the interest of the IRS is to incorrectly classify your staff employees as independent contractors. Not only are there differences in the end-of-year tax forms you issue (W-2 for employees, Form 1099 for contractors), you are required to pay taxes, Social Security, Medicare and other liabilities on behalf of full time employees. The requirements that determine classifications for individuals are closely tied to the type of service they provide and the responsibilities you as an employer undertake when contracting them. Here are some general guidelines.
- Are subject to the employer determining where and when to work and how to perform their job
- Usually conduct their job on employer-owned equipment
- Receive employer training
- Determine how a certain job will be done
- Supply their own equipment
- Often work on a per-project basis with a finite completion date
Misclassification of employees as independent contractors can cause you to be held liable for back employment taxes and expensive penalties.
Federal health insurance requirements can impact your bottom line.
Employers with 50+ employees are required to provide health benefits to at least 95% of their full-time employees and dependents up to age 26, or are forced to pay a fine. Requirements differ between small and large employers. Your business might be eligible for a small business health care tax credit to help offset some of these costs. Consult the IRS guide to the Affordable Care Act for employers to gain a better understanding of how health insurance mandates affect your business.
In-House vs. Outsourced Payroll
Managing your payroll in-house enables you keep costs down by assigning these responsibilities to someone already on your staff. You be sure that your data is kept in a secure system and only enable appropriate individuals to get access. You can also update employee records right away and respond immediately to emergency situations by last-minute issuing checks for payroll or bonuses. There are many software solutions that allow you to handle your payroll completely in-house.
However, managing your payroll yourself has some important drawbacks. Not only is it time-consuming and detail-heavy work, but mistakes on your payroll taxes or misclassification of workers can cause scrutiny by the IRS.
If your business has outgrown the ability to manage taxes in-house, or you want to be sure that you are protected from errors on your taxes, then it’s time to think about working with a professional payroll service, who can alleviate much of the burden of payroll accuracy and timeliness.
Payroll experts handle the logistics so you can focus on running your business. Most payroll companies use software that enables you to keep a close watch on payments and payroll approval, while they take responsibility for timely and accurate payroll runs and filing. Use your payroll partner to:
- Calculate hours, overtime and bonuses
- Schedule payroll runs (paper checks or direct deposit)
- Submit new hire information and ensure compliance with state and federal tax requirements
- Provide you with approvals mechanisms so you can keep an eye on payroll
- Store your data in a secure location to eliminate the risk of confidential information breaches
- Respond to notices and advocate on your behalf
- Answer questions about tax requirements and legislative mandates that apply to small businesses
Take deadlines seriously or face costly penalties.
Small businesses cannot afford to be disorganized when it comes to meeting compliance requirements. The IRS provides a detailed list of required business payroll forms and their accompanying due dates. Business that miss deadlines or ignore tax notices are opening themselves up to serious consequences. Penalties can reach up to 100% in certain circumstances if requirements go unmet. Pay attention to all notices you receive from the IRS or state taxation board and make it a priority to address them. Many mistakes are easy to correct but require knowledge of which forms to file and how to appropriately remedy the situation. Even businesses with the most well-meaning HR staff might lack the expertise to straighten out complications in a timely manner.
As a small business owner, you are required to be an expert in the product or service you provide, not an expert in tax law and payroll liability. If managing your payroll has led to penalties or undue strain on your staff, contact us at (800) 313-3763 to discuss opportunities to offload your payroll burden so you can return your focus to your business.