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Updated: May 1, 2019
Let’s be real: one of the most tedious aspects of running a business is managing payroll. Collecting forms, counting hours, and calculating tax withholdings can be complicated, but running a smooth small business payroll operation is part of running a successful business.
Ideally, “you want your payroll to be as streamlined as possible and not take time away from other important aspects of your business,” said Cortlon Cofield, CPA and owner of Cofield Advisors, a financial planning service.
So, you may be asking “how do I manage my payroll?”?
The right resources and preparation can help. Here are six smart tips to better manage payroll:
Classifying employees incorrectly can mess up your small business payroll and put you at risk for fines from the IRS come tax time. That’s why it’s critical to make sure you’re classifying employees in accordance with labor laws.
The first step is determining whether someone qualifies as an employee or independent contractor. This distinction matters as you better understand how to manage payroll for a small business because it dictates which payroll forms you’ll need to collect, as well as how much you should set aside for taxes. As a business owner, you’re responsible for calculating tax withholdings for employees, for example, but not for independent contractors.
Next, you need to figure out whether you have exempt or non-exempt employees, as defined by the Fair Labor Standards Act. Non-exempt employees are entitled to overtime pay and are required to have lunch breaks and rest periods, whereas exempt employees are typically exempt from overtime rules.
As you confirm these details, check that all the employee information you have on file is correct, including names, addresses, Social Security numbers, and tax allowance claims. Periodically reviewing and updating this information can help prevent costly errors as you learn more about how to do payroll for a small business.
It’s crucial to maintain organized records of your small business’ payroll documents, especially if you manage payroll internally.
In addition to W-2, W-4, and I-9 forms, you should also hold onto tax withholding documents, papers containing benefits information, and records of employee job descriptions or changes in compensation.
“I think it is important to have everything documented and maintained in a secured, yet shared and accessible location,” said Denise Carter, finance manager at Actualize Consulting, a firm that helps financial institutions improve their business processes.
For extra payroll management security, scan papers onto your computer and file them in folders in the cloud, then organize the hard copies in folders labeled by document type and year. The IRS recommends keeping payroll paperwork for at least three years and any documents involving wages for at least two years.
“Payroll is a sensitive function,” said Carter, “and employees do not take well to errors in processing.” Immediately recording changes — to an employee’s job status or hours worked, for example — can help reduce confusion and errors come payday.
Carter said her company documents all changes and requests on a processing matrix for each pay cycle. This helps “ensure all items that need to be addressed are [taken care of],” she explained.
Whether or not you should handle payroll management internally will depend on your personal payroll knowledge, as well as your business’ size and unique needs. Payroll tends to become more complicated the bigger your company is and the more types of workers you employ.
Whether you’re just learning how to manage payroll for a small business or debating a change to your process, consider these factors:
If you don’t have any knowledge or training in running payroll, or if you want more time to focus on other efforts, using a payroll management service can be helpful.
“Getting a team of service professionals around you early on will save your business an enormous amount of time and mistakes,” said Cofield. Doing payroll yourself can be stressful and time-consuming, especially if you’re not well-versed in tax rules and regulations.
Rod Holmes, managing partner of Chicago Style SEO, a digital marketing company, said the benefits of using a professional payroll management service far outweigh the cost. In addition to ensuring your employees get paid in full and on time, outsourcing payroll can also free you up to focus more on sales or growth strategy.
“I made this decision even when we had fewer than five employees. It removed a roadblock and allowed us to quickly grow to 14 employees,” Holmes said.
The appeal of payroll management services like ADP and Paychex is that they take care of the nitty-gritty work for you. “For example, when I want to pay a bonus to my employees,” said Holmes, “I send my payroll firm a spreadsheet of the net amount I want to hit my employees’ bank accounts. The payroll company does the calculations and lets me know what the gross amount is [that’s] going to be taken out of my bank accounts.”
If you don’t want to outsource your payroll management to a firm, you can still simplify the process by using online payroll software. Many online payroll platforms, like Gusto and OnPay, integrate with your existing accounting software to automate small business payroll and eliminate the headache of manual data entry and withholdings calculations. Plus, they can process and file quarterly taxes for you, Cofield explained, saving you time and hassle.
Using payroll management software can also help prevent errors. When you are learning how to do payroll for a small business on your own, it’s easy — and expensive — to make mistakes. In the 2017 fiscal year alone, the IRS imposed over $5 billion in penalties for mistakes businesses made on their taxes.
In addition to basic payroll management tasks like calculating employee pay, withholding, and taxes, some software services also track benefits, calculate flexible spending plans, or offer HR features. There are a variety of systems to choose from depending on your business’ needs.
Learning how to manage payroll for a small business may seem daunting, but with the right tools, it’s totally doable. If you’re setting up payroll for the first time or looking to change your current payroll system, take some time to explore your options. Examining your company goals and current pain points can help you identify which choice makes the most sense for your business.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.