Managing payroll is a crucial part of managing a small business. The slightest oversight can result in costly lawsuits and labor violations. Maintaining accurate records is the best defense against mistakes that affect employees’ paychecks or tax returns. Below are some proven payroll tips to help you manage the process more effectively.
Classifying Employees
Whether they work salaried, are paid hourly, or are independent contractors, every employee must be classified correctly. It’s the first step in establishing an employer-employee relationship based on responsibilities and wages. It also dictates whether an employee qualifies for overtime pay or not. If an employee is misclassified, the company may face penalties for back taxes, including FICA and unemployment insurance. Establishing a payroll calendar is another essential aspect of running your small business.
Ensure you have a system for gathering and filing payroll taxes and filing the required forms with state and federal taxing authorities. It also ensures you meet labor market expectations by paying your employees regularly and on time. When implementing a payroll schedule, choose one that aligns with your business’s goals and budget. Some enterprises run payroll weekly, biweekly, or semi-monthly, while others process it monthly.
When determining a pay frequency, you must consider the hours each employee works during a given period, your tax obligations, and your cash flow. A good payroll app for small business can help you determine the proper schedule for your business and automate many of your record-keeping tasks. It’s also crucial to remember that the federal government requires you to maintain records for at least four years, and state laws may require you to retain time cards and payroll information for two years.
Payroll Schedule
Every business needs to process payroll from the largest corporation to the smallest mom-and-pop shop. However, despite the operational differences between enterprises of all sizes, many factors are present in managing payroll, from tax regulations and wage laws to employee pay rates and benefits preferences.
One of the first payroll tasks a small business owner must undertake is deciding on a payroll schedule and determining how often employees will be paid. Several payroll schedule options exist, including weekly, biweekly, and monthly. Each has advantages and disadvantages, but a business owner should carefully consider how the schedule aligns with their cash flow needs.
The payroll schedule should also consider any hourly or nonstandard work required to complete a task. For example, if a job requires a worker to receive tips frequently or to work unscheduled shifts, the business owner should plan accordingly to ensure that the payroll is processed correctly and on time.
Once the business has settled on a payroll schedule, it should communicate it to all employees to prevent confusion and misunderstandings. It can be done by distributing a memo, posting it in the workplace, or sending an email notification. Regular communication around payroll is crucial because it can help build employee trust and loyalty. It’s also helpful to provide employees with an opportunity to voice their questions or concerns about payroll.
Salary Status
Navigating payroll is one of the most critical parts of running a small business. It determines how you and your employees get paid. Whether your employees are hourly or salaried, you need to be able to process payments quickly and accurately. To do this:
- Ensure you have a system to track hours and ensure compliance with overtime pay requirements.
- Use a time tracking software and double-check all data entries to avoid errors.
- Ensure that you have a method to collect and submit payroll taxes and file the necessary paperwork with the Internal Revenue Service and state taxing agencies.
Another critical aspect of payroll is determining how much you will pay yourself as the owner. It is called an owner’s draw or draw against profits. Ideally, base this on a percentage of net business income after setting aside 30% for taxes and saving into your business savings account. Clear and consistent payroll handling procedures will save you time and money.
Be sure to communicate these policies with your employees so everyone is on the same page. Reviewing and revising your payroll policies as needed is good, significantly if state laws change or your business grows. Lastly, always be open to suggestions and feedback from your employees. It will show that you value their input and are invested in improving your payroll processes.
Pay Frequency
Depending on the industry, your business’s needs, and your employees, there are many ways to determine payroll periods. You can pay your team weekly, biweekly, semi-monthly, or monthly. Determining how often you plan to spend your team is essential, as it will influence everything from employee schedules and cash flow to federal and state regulations, deductions, and overtime calculations.
Weekly payrolls are the most common for small businesses. It is a good option for hourly employees and those who earn overtime. It also allows you to track and process time cards efficiently and ensures compliance with minimum wage and overtime laws.
A biweekly payroll is similar to a weekly one except that it happens every other week on a set day of the week (like Friday). It is the most popular option for companies as it’s easy for exempt salaried employees to calculate overtime, and it reduces costs compared to running payroll 52 times per year, as you only need to cut 26 checks. Monthly payrolls are less common, but they’re a good choice for smaller companies and may be the only option when starting.
It’s easy for accounting to total all deductions and taxes and is a popular option for those who want to cut their payroll costs. In addition, it’s more convenient for employees, as they can receive their paychecks on the same date each month.
