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How To Manage Payroll For Small Business

Payroll is a lot more than just giving money to employees in exchange for work.

Whether you have one employee or 100, properly managing payroll is essential for small business owners.

You are financially accountable not only to your employees but also to the government. Complying with state and federal regulations and tax laws while making sure everyone is paid correctly and on time can be a lot to manage.

As a small business owner, you may be asking, "How can I manage my payroll effectively?"

Whether you do payroll yourself, manage payroll software, hire a payroll provider, or use payroll services, you should understand what needs to be done.

Read on to learn what it takes to stay on top of your payroll.

How To Manage Payroll

Here are some of the main duties for managing payroll, and where to start:

Business Number

First and foremost, your company needs to obtain an Employer Identification Number (EIN). This number is a specific and unique identifier for your business. It may be called something different outside of the US but most countries require some kind of identification number for payroll and tax reporting. An EIN can be applied for online or by fax or mail.

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Know Your Local Regulations

An EIN is federal, you may need other numbers for state or local tax designations. Make sure you know what you need to make it easier to get started with payroll.

Understand your Employees

There is a difference between independent contractors and an employee and they are not treated the same in regards to payroll.  Define their position by asking yourself:

  • Do you control when, where, or how the individual completes their work?
  • Do you pay expenses, for tools like computers?
  • Does the person have continued employment or they just on one project?
  • Do you offer them benefits?

If you answered “yes” to any of these questions, chances are the person is an employee rather than an independent contractor. That means you will have to make the appropriate deductions.

Tax and Payroll forms

One of the first things you have to do when hiring employees is to get their forms in order and make sure all of their payroll and tax information is in one place. Look into direct deposit for easier check processing. Employees must fill out forms for proper tax withholding and prove that they are legally allowed to work in the country.

Choose a Paycycle

Fewer pay periods mean less work when it comes to payroll and companies usually determine this according to management preferences. Payroll can be weekly, biweekly, or, less commonly, monthly. Once again, there may be local regulations that determine this for you so check on those. If not, you may want to assess cash flow, etc. and choose the best timeline for the company.

Make Sure Adequate Payroll Processes are in Place

To pay your employees accurately, you have to track their hours. This can be as simple as a sign-in sheet or more high-tech using software to track employee activity. A punch clock works, too.

Along with working hours, you need to have a specific policy for time off: what is paid, what is not, vacation vs unpaid leave. Make sure that overtime pay is accounted for as well.

Finally, you need proper processes that address the benefits and taxes for your workers. Using a software program that keeps this information all in one place means payroll is simplified and all the information is at your fingertips.

Choose Payroll Software or a Payroll Service

There are a lot of programs available that make processing payroll simple. If your company has multiple employees, you may want a Human Resources Management System (an HRMS or HRM system) that includes payroll or you can go with a standalone payroll software program.

The other option is to outsource the work to a payroll service, meaning you won’t have to worry about software. There are a lot of payroll companies out there, a lot of which specialize in small businesses.

Related Read: Best HR Software For Payroll Shortlist

Process Payroll

Now that everything is in place, it’s time to start running payroll. Gather the number of hours worked for hourly employees and enter it into the system along with salaried employee's information. Once this is done, the payroll program runs the cheques or initiates the sequence for a direct deposit while tracking tax and benefits totals.

Back up Your Data

In addition to paying your employees, you will also have to submit annual taxes to the state and the federal government. Make sure you have all the data that pertains to anyone who was employed by you during the year, even if they only worked a few days. This data should be protected and backed up to make sure you have access for both the tax department and the employee.

Pay Your Taxes

Now that you have your system up and running and have paid your employees, submit taxes as required. The money taken out of their paychecks for taxes must be remitted properly along with the company’s contributions as well.

Following these step by step instructions not only should help not only get payroll set up but also indicate the best process to follow so your business meets the needs of its employees and the requirements of the government. Payroll is not complicated but if it isn’t done correctly, it will be hard on your workers and get you in trouble with the government. Doing it right the first time around saves hassles in the future.

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Need more resources for your small business? Check these out:

By Finn Bartram

Finn is editor-in-chief at People Managing People. He's passionate about growing organizations where people are empowered to continuously improve and genuinely enjoy coming to work. If not at his desk, you can find him playing sports or enjoying the great outdoors.

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