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Payroll is a lot more than just giving money to employees in exchange for work. Whether you have one employee or 100, complying with state and federal regulations and tax laws while making sure everyone is paid correctly and on time is essential, and it can be a lot for small business owners to manage.

So, how can you manage payroll effectively? Whether you do it yourself, use payroll software, hire a payroll provider, or use payroll services, you should understand exactly what needs to be done. Here I'll share what it takes to help you stay on top.

How To Manage Payroll Step-by-Step

Here are some of the main duties for managing payroll. I've sequenced them as steps, so it's easy to follow if you're a small business or doing payroll yourself.

1. Obtain a 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.

2. 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.

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3. 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:

  • 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.

4. Get tax and payroll forms in order

One of the first things you have to do when hiring employees is get their forms in order and ensure 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 they're legally allowed to work in the country.

5. Choose a pay cycle

Fewer pay periods mean less work when it comes to payroll, and companies usually determine this according to management preferences. Payroll frequency can be weekly, biweekly, or, less commonly, monthly. Some employers also give the option for employees to access on-demand pay.

Once again, there may be local regulations that determine this, so check on those. If not, you may want to assess cash flow and choose the best time for the company.

6. Put adequate payroll processes in place

To pay your employees accurately, you have to track their hours. This can done through a sign-in sheet, software that tracks employee activity, or a punch clock.

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 overtime is accounted for.

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.

7. 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.

Of course, you can also 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.

8. 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.

9. 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 so you can access it both for the tax department and the employee.

10. 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 should not only help you 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.

The Impact of Effective Payroll Management on Business Objectives

Effective payroll management isn't just another administrative task. It's a critical component in aligning with broader business goals for five key reasons:

  1. Financial Stability and Budget Management: Accurate and efficient payroll management ensures that a significant portion of the company's expenses (employee salaries and benefits) are correctly budgeted and managed. This financial stability is crucial for long-term planning and investment, directly impacting the company's ability to achieve its strategic objectives.
  2. Employee Satisfaction and Retention: Timely and accurate payroll processing contributes significantly to employee satisfaction. Satisfied employees are more engaged, productive, and loyal, which is essential for achieving business goals related to workforce stability, quality of work, and company reputation.
  3. Regulatory Compliance: Proper payroll management ensures compliance with tax laws and labor regulations. This compliance is vital for avoiding legal penalties and maintaining a positive company image, which in turn supports broader business objectives like market credibility and operational continuity.
  4. Resource Allocation: By streamlining payroll processes, resources (both time and money) can be more effectively allocated to other strategic areas of the business, such as growth initiatives, innovation, and market expansion.
  5. Data-Driven Decisions: Efficient payroll systems often provide valuable data on labor costs and trends, which can inform strategic decision-making in areas like staffing, budgeting, and compensation strategies, aligning closely with the company's overall business objectives.

Current Trend: Balancing Compliance And Innovation

Balancing compliance and innovation in payroll management is a constant challenge. More and more often, business feel a need to adhere to complex and changing regulations while integrating new technologies like AI and automation. After all, the world we're living in with AI and other tools is evolving very quickly!

While compliance ensures legal adherence, it can limit flexibility in adopting innovative solutions that improve efficiency and risks leaving your business in the dust. On the other hand, implementing these innovations requires careful management to avoid disrupting compliant operations. Of course, the need to protect sensitive data adds yet another layer of complexity to the mix.

The key is to innovate in ways that enhance efficiency and offer strategic insights, while rapidly adapting to new legal requirements and ensuring data security and privacy. This balancing act demands a brilliant collaboration between payroll experts, legal advisors, and technology specialists.

Payroll Software Reviews

Earlier in this article, I outlined the importance of choosing your payroll software or service. Naturally, there are a number of things to look for when making a decision—and many options out there—so I've rounded up a few software reviews to help:

  • Deel software review: "This simplifies the hiring, onboarding, and payment processes for international contractors and employees. Its platform is tailored for startups, small businesses, and HR teams that manage remote, global workforces." It has automatic compliance and supports multiple currencies, but cost can be a hurdle and the array of features can be overwhelming at first.
  • Papaya Global review: "This is a comprehensive information system designed to streamline workforce management, payroll management, and other human resources tasks. It targets HR professionals and businesses looking to manage a global workforce efficiently." It's great for international compliance and real-time insights, but again has a higher cost and limited customizations.
  • Remofirst software review: "This is a payroll platform designed to simplify and streamline payroll processing for businesses. It primarily caters to small to medium-sized companies looking for efficient payroll management solutions." Its system integration and real-time reporting are pros, but there's a learning curve with its features, plus limitations with customizations and support.

PRO TIP: Check out our full list of vetted payroll software and search for their reviews across the People Managing People website for more detailed information.

Cost Analysis of In-House vs Outsourcing Payroll

Another factor for small businesses is of course cost. Here's a simplified table that compares the cost analysis between managing payroll in-house and outsourcing it.

Cost FactorIn-House PayrollOutsourcing Payroll
SoftwareCost of purchasing and maintaining payroll software; hardware costs if needed.Included in the service fee of the provider.
StaffingSalaries for payroll staff; benefits and training costs.No direct staffing costs; handled by the provider.
TrainingOngoing training for software updates and legal compliance.Typically not required as the provider manages updates and compliance.
ComplianceCosts associated with staying compliant with tax laws and regulations.Compliance is typically managed by the provider, reducing direct costs.
Operational TimeTime spent by staff in processing payroll, generating reports, etc.Time is saved as the provider handles most of the operational tasks.
Error CorrectionPotential costs related to errors in payroll processing.Reduced error rates due to specialized expertise; any errors are typically the provider's responsibility to correct.
Software UpdatesRegular software update costs.Included in the service fee; the provider ensures software is up-to-date.
ScalabilityMay require additional investment as the company grows.Outsourcing is often more scalable with variable costs depending on company size and needs.
SecurityCosts for securing payroll data and ensuring privacy.Security is managed by the provider, though due diligence is required to ensure their standards meet your needs.
Miscellaneous CostsCosts for printing, distributing payslips, etc.Often reduced or eliminated as most processes are handled digitally by the provider.
A simplified table showing the cost analysis between in-house and outsourcing payroll.

In conclusion, the cost of payroll is generally higher when it's in-house but it offers more direct control. Outsourcing can be more cost-effective in terms of operational time and resource management, but it requires trust in the chosen provider.

For a more accurate analysis, specific quotes and assessments should be obtained based on the needs of your business. I suggest using this table just as a guide.

Get (Pay)rolling Smoothly

As a small business owner, the technicalities of payroll can feel like a lot to think about. But once you know your local tax regulations and get your forms and processes in order, things start to get a little easier. Here are a few key takeaways:

  • It's important to follow payroll best practices so your business meets the needs of its employees and the requirements of the government.
  • When selecting payroll software, be sure to read reviews and note the pros and cons so you can make the best selection for your business.
  • Whether you keep payroll in-house or outsource it, there are perks to both sides. This is a personal choice, made to suit the unique needs of your business.

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You can also check out our guide on outsourcing HR to discover what other HR functions could benefit from being outsourced.

By Finn Bartram

Finn is an editor 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.