Imagine your business without employees; everything stops. Even with a surplus of inventory and functional machinery, your business comes to a screeching halt without your labor force. So, while payroll may not be the most exciting administrative responsibility, the task is essential to keeping the gears of your business moving.
The Importance Of Payroll Management
As a business owner, it’s your responsibility to ensure payroll is done correctly and on time. Though payroll can be time-consuming, a defined payroll management process can help significantly.
Payroll management is the process of compensating employees for the services performed, including calculating employee hours, distributing employee pay, withholding taxes, and keeping detailed financial records.
Good payroll management helps with employee retention. Employees feel valued when they know their paychecks are accurate and timely, especially if your company offers additional benefits such as health insurance or a 401(k). Employees who know their employers care about them as individuals instead of just numbers on a spreadsheet are more likely to stay at their jobs long-term.
Payroll management also ensures accuracy when calculating taxes, deductions, and benefit contributions so employers aren't penalized by government agencies such as the IRS due to mistakes made during this process.
How Do I Get Started With Payroll Management?
Taking the first steps toward paying yourself and your employees can seem intimidating, but it doesn't have to be overwhelming. Here's a breakdown of starting the process:
- Apply for an Employer Identification Number (EIN)
Similar to how individuals have Social Security Numbers (SSNs), businesses have an EIN used by the IRS to identify the company and who pays employees. You can obtain your EIN for free on the IRS website. Additionally, depending on your local and state government, you may need a state ID number to pay state income taxes.
2. Collect employee information
Collect all the necessary information from your employees, including their full names, addresses, SSNs, and tax withholding forms. Each of your employees needs to fill out several government documents, including:
- Form I-9: Employee Eligibility Verification
- Form W-4: Employee's Withholding Certificate
- State withholding allowance certificates
3. Determine your payroll schedule
Decide how often you want to pay your employees; the most common options are weekly, bi-weekly, and monthly. When scheduling payroll, be sure you comply with the legal requirements of your jurisdiction, which may determine how frequently you must pay certain types of employees.
4. Calculate employee pay and withhold deductions
Calculate gross pay by adding up all the hours worked by an employee during the predetermined pay period, including any bonuses or overtime. You can calculate net pay by subtracting deductions from gross pay, such as federal income tax withholding, state income tax withholding, unemployment taxes, and FICA/Medicare taxes.
5. Pay employee and income taxes
After calculating the payroll, process it by generating paychecks or initiating direct deposits. Payroll taxes must be filed with the government regularly, depending on your business size and location. It’s your responsibility to comply with all legal requirements and stay current on any changes to local regulations.
If you fail to withhold the employee portion of employment taxes, you, as the business owner, may be liable to pay your share to the IRS.
6. Document and store payroll records
Keep all payroll records and documentation for at least three years. These records include pay stubs, tax filings, and employee information. You'll need these records when you prepare your annual report to the IRS or state revenue agency; they will also come in handy if there's ever an audit or dispute over employee compensation or wages paid during that period.
Payroll Management Best Practices
With the number of steps, regulations, and time it takes to manage payroll, there's a lot to keep in mind to ensure successful compliance with all payroll laws and deadlines. These tips will keep your process organized and achievable:
- Ensure your payroll system is convenient for your employees to access their pay and benefits.
- Integrate payroll with timekeeping, so you can easily track hours worked, calculate an employee's paycheck, and always pay employees on time.
- Conduct regular audits of payroll records to ensure accuracy, including:
- The number of hours each worker has clocked in during the pay period (including any overtime).
- Each worker’s pay is based on their hourly rate, any deductions from their gross wages (such as taxes), and other factors, including commissions or bonuses.
- Stay up to date on annual changes when calculating taxes. Payroll regulations constantly change, and failure to stay current can result in compliance issues.
Common Payroll Mistakes To Avoid
You want the best for your employees, especially when delivering their paychecks, but payroll is a field full of obstacles that can end in significant fines. To prevent delays or errors in payroll delivery, steer clear of these frequently made mistakes:
- Incorrect calculations: It's easy to make payroll mistakes, such as not factoring in overtime, deductions, or bonuses. Using a payroll software can help streamline the process and reduce errors.
- Misclassifying worker status: You must classify your workers as either independent contractors or employees. If misclassified, you could be liable for back taxes and penalties.
- Forgetting to update employee information: If employee information, such as their address or tax withholding forms, isn't updated, it can lead to errors in payroll calculations.
- Not complying with regulations: Failing to comply with federal, state, and local payroll regulations can result in costly penalties and legal issues. Payroll taxes filed late will lead to penalties and interest charges.
- Not keeping accurate records: Poor record-keeping of payroll information can lead to errors, audits, and legal issues.
- Poor communication: Communication breakdowns between the payroll department and employees can lead to confusion, errors, and dissatisfaction.
The Benefits Of Outsourcing Your Payroll Needs
Payroll management can be time-consuming and complex; outsourcing can be an excellent solution for your business. Here are some benefits of outsourcing your payroll management to consider:
- Faster, more accurate payroll processing – Payroll management services can process your employees' paychecks quickly and accurately. They have access to the latest software and technology, making it easier for them to handle all the details of calculating taxes and deductions, direct deposits, and other payroll functions. Payroll mistakes can be costly and time-consuming to correct; outsourcing payroll management can ensure that you comply with all legal requirements and avoid penalties.
- Better customer service for your employees – Payroll outsourcing companies have experts knowledgeable in payroll regulations and best practices, providing advice and guidance on all payroll-related issues to your employees. They’ll answer your employees' questions about their paychecks or tax filings, which may seem small but can save you a significant amount of time.
- Strong data security – Payroll data is sensitive and confidential. Payroll management providers offer proprietary technology to ensure your confidential information is secure and protected from theft, fraud, and other security threats.
- Reduced administrative burden on you as an employer – Your business is likely too busy running day-to-day operations such as hiring and recruiting or developing new products or services. There's no reason you should be responsible for handling tedious administrative tasks such as managing payroll records on top of that.
- Ease growing pains – As your business grows, managing payroll can become more complex. A third-party management company, such as a professional employer organization (PEO), allows you to scale up your business as needed without monopolizing your time.
Payroll Management Made Simple
Starting payroll management may seem daunting, but it’s a critical function for any business as it’s your responsibility to pay your employees and file taxes by the respective due dates. Payroll management is a complex process that requires careful attention to detail, but you don’t need to do it alone. GMS gives you the ease of mind of knowing that your employees are in good hands regarding their paychecks and that all taxes are filed appropriately.
Our online payroll software includes tools such as an integrated timekeeping system to help you keep track of your employee’s hours and wages without worrying about monitoring items like double-time entries. We take tedious tasks such as paperwork, tax records, and deductions off your plate, saving you valuable time.
Get in touch today about outsourcing your payroll with GMS so you can spend less time worrying and start spending time growing your business.