Small businesses enjoy a certain agility and innovativeness that large companies need help to attain. Still, there are unique challenges particularly affecting smaller businesses, the prominent of which is payroll management.
While some payroll management services offer bespoke solutions, most small businesses find their cost out of reach. Unfortunately, there is no alternative to managing payroll as it is mandatory for legal compliance, employee satisfaction, and business profitability.
That’s why we created this guide on payroll management for small businesses to help in growth and sustainability.
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How do you manage payroll for small businesses?
Managing payroll for small businesses should be more straightforward, given the smaller number of employees, but it must be accurate. Here are the tips for small businesses to manage payroll and streamline processes to utilize their limited resources better.
1. Create a payroll policy
Payroll management for small businesses should start with a clear and comprehensive payroll policy. It must provide you with a complete outline of how you will manage payroll. The payroll policy must include information about the frequency explaining how often payroll will be processed, such as weekly, bi-weekly, semi-monthly, or monthly.
The policy should also outline the wage calculation methods for employees so they know how your business calculates overtime, bonuses, and deductions. While creating the payroll policy, you must ensure that it fully complies with federal, state, and local tax laws.
A well-defined payroll policy provides consistency and transparency in your payroll management. You can maintain more than one payroll policy for different categories of employees.
2. Set up a payroll system
A small business has several options to manage payroll. However, the decision should consider the needs of the business, available resources, and convenience when selecting a payroll system.
(A) Manual payroll:
The most obvious choice for businesses with limited employees is manual payroll. It involves a pen-and-paper approach to record attendance and calculate wages. While manual payroll is straightforward and cost-effective, it can be time-consuming and prone to errors. This is why small businesses should focus on automating payroll management.
(B) Outsource payroll:
If your business doesn’t have the resources to set up a payroll system, you can consider professional payroll management services. While outsourcing, payroll will incur a cost, it will free up your time to focus on core activities to improve profits.
Furthermore, many small businesses outsource their payroll management services to professionals to easily comply with labor and tax requirements.
(C) Payroll software:
Savvy entrepreneurs and small business owners choose payroll software like Quickbooks and Oracle. Software solutions are cost-effective and efficient as they automate most of the processes associated with payroll management, such as payroll calculations, tax deductions, and report generation.
Additionally, payroll software eliminates the scope for human errors and offers accuracy, time savings, and data security.
3. Integrate a time-tracking system
You can expect to manage payroll accurately with a precise time tracking method. Any efficient payroll system must have an integrated time-tracking system to monitor and manage work hours, overtime, and breaks.
Time-tracking systems eliminate the need for manual time recording, which reduces errors, eliminates time theft, and assists in accurate employee wage calculation.
It can also track task based work which in turn helps track employee productivity and identify issues preventing employees from working efficiently. Modern time and attendance tracking systems like Truein can easily integrate with most payroll softwares.
4. Obtain Employer ID Number (EIN)
An Employer Identification Number (EIN) is a unique tax identification number issued by the Internal Revenue Service (IRS) to businesses for tax purposes. You will require EIN for each employee for payroll.
Companies must include EIN when reporting payroll taxes. If your small business withholds federal income and payroll taxes from employee paychecks, you need EIN. It is also necessary for annual W-2 and other tax filings.
Payroll management for small businesses starts with obtaining an EIN for every worker to ensure proper tax compliance.
5. Ensure proper categorization of employees
One of the reasons why payroll management is complicated is because tax implications and wages differ for employees depending on their categories. Your employees can be:
(A) Salaried vs. Hourly:
The most common category is salaried and hourly employees. While salaried employees receive a fixed monthly or annual salary regardless of hours worked, hourly wages are paid based on the hours worked.
(B) Full-Time vs. Part-Time:
Full-time and part-time employees are based on the number of hours they work per week. Usually, full-time employees typically work 40 hours a week and receive more benefits.
(C) Exempt vs. Non-Exempt:
This classification determines whether a worker can work overtime. Non-exempt employees are eligible for overtime when they work more than a certain number of hours per week. Learn more about what full time exempt employees are here.
6. Link to payment systems or bank accounts
Part of payroll management is setting up payment systems to disburse salaries and pay for expenses. Today, most small businesses use Internet banking services to transfer funds to their employees, but some still pay with checks.
Whatever option you choose, it is essential to ensure that once you’ve accurately calculated your employees’ wages, they receive their compensation on time and with minimal hassle.
Direct deposits are the most convenient, and we recommend the same for all small businesses. There is payroll software that easily integrates with the business’ banking system for transferring money to employees’ bank accounts automatically after wages are calculated and approved.
7. Fill in employee personal as well as job details
Accurate employee information is not only essential for payroll management, it is also required for tax rules compliance. You should regularly update employees’ personal and job-related details to ensure employee records are accurate.
Personal information includes employee names, addresses, social security numbers, and contact information. In contrast, job-related details have job titles, employment status (full-time, part-time, contract), pay rates, overtime eligibility, and tax withholding preferences.
8. Choose a payroll schedule
Selecting an appropriate payroll schedule makes it infinitely easy to manage payroll. There are no regulations regarding payroll schedules, and you can independently decide when your employees are paid. Some of the payroll schedule options are:
- Weekly: Paying employees every week provides frequent compensation and is suited for businesses with short-term or temporary staff.
- Bi-Weekly: Bi-weekly payments are cost-effective as they ease wage and tax calculation frequency and are suitable for most small businesses.
- Monthly: Monthly pay is straightforward, offering payment on a fixed date every month. However, it might align with the financial needs of some employees.
Choose a payroll schedule that fits your business’s cash flow, operations, and employee preferences.
9. Keep updated with tax rules and laws
Compliance with tax rules and laws is one of the fundamental requirements of payroll management. For any small business, staying up-to-date with tax rules and laws is an ongoing responsibility. Tax regulations can change anytime, so you must be vigilant.
Periodically review tax guidelines at the federal, state, and local levels to keep track of any changes in the requirements. Professional payroll management services assist if you find monitoring tax regulations particularly complex.
Adherence to tax laws is a requirement to avoid legal complications and hefty penalties. Effective payroll management facilitates compliance and ensures small businesses do not run into trouble with IRS or labor laws.
10. Automate your payroll
Small businesses can avoid hassle and tedious hours of manual labor by automating the payroll process. Payroll software can automate wage calculations, tax withholdings, and deductions, eliminating human errors.
Automation also reduces the time and effort required to process payroll. Furthermore, payroll software has security features to protect sensitive payroll information.
How does Truein help ensure compliance with accurate payroll processing?
Truein is a powerful time and attendance management tool that aids small businesses in managing payroll accurately and efficiently. It is crucial to ensure accurate payroll processing by providing precise time-tracking data and generating payroll-ready reports.
A cloud-based facial recognition system, Truein has comprehensive time-tracking features that can track employees even at remote locations. It comes with GPS geofencing that ensures employees are present at the work site during their shifts.
Truein eases payroll management for small businesses by seamlessly integrating with various payroll software solutions. It generates payroll-ready reports for small businesses which makes calculating salaries at every month end a breeze.
Managing payroll should be easy for small businesses. Following the tips outlined in this guide, you can make payroll management easy and ensure employee satisfaction, compliance, and overall business success.
Effective payroll management is not just necessary for tax and law compliance. Still, it’s also an opportunity to streamline financial operations, improve employee morale, and minimize legal risks, all of which are essential for the long-term success of your small business.
1. What are the basics of payroll?
Payroll basics include accurately recording work hours, calculating employee wages correctly, accounting for taxes and deductions, timely distributing payments, and maintaining compliance with tax laws and regulations.
2. Which is better - payroll in Excel vs. payroll with software?
Payroll software is generally suitable for most small businesses, while Excel can be cost-effective for small businesses with a few employees. Automated payroll software reduces errors, saves time, and provides greater data security, which offers accuracy and better compliance.