By 
Getting payroll right is crucial for maintaining employee satisfaction and productivity, and it represents a significant expense with little margin for error. Payroll teams have a broad range of responsibilities, and processing paychecks is just the beginning.
Given the complexity of managing payroll, businesses of all sizes can benefit from refining their processes or simply outsourcing payroll services. Here are 15 payroll tips and tricks to help companies manage payroll more efficiently, from adhering to wage laws to optimizing processes with the right payroll software.
What Is Payroll?
The term “payroll” encompasses several aspects, but it generally refers to the complete process of compensating employees. Payroll involves many components beyond simply ensuring that workers are paid accurately and promptly. It includes staying updated with changing tax and wage regulations, managing payroll taxes, maintaining necessary records, administering benefits, ensuring sufficient funds for payroll expenses, and even addressing employee satisfaction.
15 Essential Payroll Tips and Tricks for Businesses
Effectively managing payroll involves navigating numerous variables and complexities. For new businesses, the scope of payroll responsibilities can be overwhelming. Even established companies can benefit from a refresher to ensure they don’t overlook crucial aspects. Here are 15 payroll tips and tricks to help manage payroll efficiently and minimize costly errors.
1. Obtain an EIN
Any business with employees or plans to hire must obtain an Employer Identification Number (EIN). The IRS uses this number to monitor payroll tax payments and business income taxes. Securing an EIN early is advantageous for companies expecting to hire, as it allows for immediate onboarding when you’re ready to expand.
Businesses can obtain an EIN free of charge from the IRS. The quickest method is to apply online via the IRS website, though applications can also be submitted by fax, mail, or telephone. The process is generally simple, requiring a valid taxpayer identification number such as a Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), or another EIN.
2. Set a Budget
Understanding the financial impact of payroll expenses is crucial for any business, as maintaining enough cash flow to pay employees accurately and on time is essential. Payroll often turns out to be a more significant expense than anticipated. In addition to salaries or hourly wages, employers must also match Social Security and Medicare contributions, which amount to 7.65% of gross pay.
Payroll taxes can vary by state, with some states imposing additional employment taxes. Companies that provide benefits such as health insurance or a 401(k) match must also factor in these costs. Altogether, taxes, benefits, and other expenses can increase total payroll costs by about 15% to 20%.
To effectively budget for payroll, it’s helpful to calculate total payroll costs as a percentage of revenue to ensure it doesn’t adversely affect the company’s financial health. This percentage can vary by industry, so examining the payroll expenses of successful publicly traded companies in your sector can provide valuable insights.
3. Classify Workers Correctly
To ensure accurate payment and compliance with IRS and state regulations, it is essential to correctly classify workers. Workers are generally classified as either employees or independent contractors based on the business’s needs and operational structure. Misclassifying employees as independent contractors can result in significant tax penalties, as businesses are required to adhere to tax contribution and withholding laws for employees, but not for independent contractors.
Each employee, whether full-time or part-time, must provide the employer with an IRS Form W-4, while independent contractors need to submit Form W-9. If there is uncertainty about how to classify a worker, businesses can complete and submit IRS Form SS-8, which requests a determination of worker status for federal employment taxes and income tax purposes.
4. Determine Hourly or Salaried Pay
Employees must be further classified as either hourly or salaried. Hourly workers, protected by the Fair Labor Standards Act (FLSA), are entitled to overtime pay for hours worked beyond 40 in a week. In contrast, salaried workers may be exempt from FLSA overtime regulations.
Many companies prefer salaried positions to maintain consistent payroll expenses, as employees receive the same amount each pay period regardless of hours worked. However, salaried employees must fulfill specific job duties and requirements set by the Department of Labor. Alternatively, hourly wages can offer more flexibility, allowing managers to adjust hours as needed.
5. Establish a Payroll Schedule
Establishing a payroll schedule that aligns with your business’s cash flow is crucial for avoiding financial shortfalls. However, it’s equally important to adhere to federal and state regulations, as payroll schedule requirements can differ. Consistency is key—employees depend on regular paychecks, and any irregularities can negatively impact morale.
While biweekly pay periods are most common, some businesses opt for weekly, monthly, or semimonthly schedules. Less frequent payroll runs can reduce paperwork, but employees might prefer more frequent pay. Choose a pay period that balances your cash flow needs with your employees’ preferences.
6. Stay Updated on Labor Laws and Tax Requirements
Tax regulations ensure that companies pay the correct amount of employment taxes, while labor laws are designed to protect employees’ rights and well-being. These regulations exist at federal, state, and local levels, and they are frequently updated. Non-compliance with these changes can result in incorrect payroll calculations and tax liabilities, leading to substantial fines and penalties. Missed deadlines can also incur penalties, and violations of labor laws can lead to issues with the Department of Labor, decreased employee morale, and potential lawsuits.
To avoid these pitfalls, businesses must stay well-informed about all wage laws and tax obligations. Regularly updating your knowledge and keeping a calendar of important tax deadlines is crucial. Additionally, considering a dedicated payroll provider can help ensure compliance with the latest labor laws and payroll regulations.
7. Keep Policies Simple and Clear
Complicated payroll policies can make the process more challenging and confusing for employees. Develop clear guidelines on payment schedules, attendance, paid leave, and benefits. Maintain an accessible payroll policy document and update it as needed. Ensure employees can easily access and understand these policies.
8. Be Transparent with Employees
Transparency in payroll processes helps maintain trust and morale. Communicate openly about any payroll errors or policy details. Provide clear explanations for any discrepancies and outline steps taken to resolve issues. Consider creating a FAQ section to address common employee questions.
9. Maintain Thorough Payroll Records
Accurate payroll records are vital for understanding costs, managing disputes, and complying with legal requirements. Certain records, such as employee names, hours worked, and wages, must be kept for specific periods. Follow FLSA and IRS regulations for record retention and ensure records are safely stored and easily accessible.
10. Double-Check Data Entry
Errors in payroll data entry can lead to significant issues. To avoid mistakes, always review time sheets, calculations, and employee information before processing payroll. Accurate data entry ensures compliance and helps prevent costly errors and employee dissatisfaction.
11. Simplify Processes
Managing payroll involves numerous calculations, which can be overwhelming for businesses. Since payroll is time-sensitive, delays are not an option. Simplifying payroll processes—without compromising accuracy—can save time and money while ensuring employee satisfaction.
To streamline payroll management, consider hiring a dedicated payroll team, utilizing payroll software, or outsourcing the task. Efficient payroll practices can enhance performance and cash flow. For instance, adopting direct deposit eliminates the need for paper paychecks.
Payroll software can automate calculations, speeding up the process and reducing the risk of human error. Additionally, outsourcing payroll services ensures that your business remains compliant with ever-changing tax and wage regulations.
12. Use Direct Deposit
Direct deposit simplifies payroll by automatically transferring funds to employees’ bank accounts on payday. This method reduces the risk of lost or stolen checks and can be integrated with payroll software for electronic pay stubs. Set up direct deposit through your business bank provider or payroll service.
13. Invest in Payroll Software
Payroll software is essential for streamlining the payroll process and enhancing efficiency. Most solutions automate time-consuming and error-prone tasks, such as calculations, tax withholdings, and filings, allowing payroll managers to focus on other responsibilities. Additionally, many payroll systems automatically facilitate direct deposit payments.
When selecting payroll software, it’s important to look beyond just the cost. Consider the software’s ease of use, whether it offers employee self-service features for accessing and updating personal information, and its ability to integrate with other financial systems. Choosing a solution that works seamlessly with accounting and HR software can further simplify business operations and improve overall efficiency.
14. Automate Tax Calculations
Taxes can be complex, with various obligations based on employee incomes and withholdings. Use payroll software or services that automatically calculate and pay federal, state, and local taxes. This helps ensure compliance and saves time while reducing the risk of costly errors.
15. Integrate Systems
Integrating payroll software with accounting and HR systems streamlines operations and provides a comprehensive view of business health. Integration reduces duplicate data entry and keeps all systems updated in real time. Look for payroll solutions that offer integration capabilities to enhance overall efficiency.
By implementing these tips and tricks, businesses can effectively manage payroll, minimize errors, and ensure smooth operations.
Faster, More Accurate Payroll Runs
Managing payroll can be challenging, even for small businesses with just a few employees. With numerous tax regulations, wage laws, and individual employee pay rates and benefits to manage, companies often struggle to keep payroll operations running smoothly and efficiently.
To streamline payroll processes and ensure accuracy, businesses should consider adopting advanced payroll solutions that automate calculations, manage tax withholdings, and handle employee benefits. These tools can help simplify complex payroll tasks, reduce errors, and improve overall efficiency, allowing businesses to focus on their core operations while ensuring employees are paid accurately and on time.
Comments