How To Manage Payroll: Expert Tips For Business Owners

Employees are key to a successful business. And if you want to have a great team, you must manage payroll well.

Managing payroll requires correct categorization of your employees, effective timekeeping systems, and strict attention to labor laws.

As a business owner, you’ll need to set up a few things first and make several decisions about your employees, like hourly vs. salary and payroll schedule. Once you’ve done that, it’s time to follow our expert tips to help you manage payroll like a pro!

Table Of Contents

• What is Payroll?
• The Importance Of Managing Payroll
• How To Manage Payroll: Getting Started
• How To Manage Payroll: Expert Tips

What Is Payroll?

At the most basic level, payroll simply ensures your employees are compensated correctly. iT includes calculating and distributing wages or salaries, tracking hours worked, and deducting taxes and other withholdings from employee paychecks.

However, payroll involves more than just cutting paychecks. It also includes managing employee benefits, maintaining accurate records and reports, and ensuring compliance with government regulations.

It’s a complex and critical part of running a business, requiring attention to detail and accuracy.

The Importance Of Managing Payroll

Managing payroll is crucial for running a successful business. Your employees will need to get paid for their work, and the only way you’ll keep them motivated is if you’re paying them on time and in the right amount.

And it’s not only the employees that require you to manage payroll effectively; the law does as well.

Federal labor laws require precise recordkeeping, as well as minimum wage, overtime, and child labor standards to be met. State and local laws may have additional requirements.

On top of that, employers must keep track of withholding and pay payroll taxes for their employees, ensuring such payments are both timely and accurate.

Plus, other business expenses, such as workers’ compensation insurance, are directly related to your payroll.

As a business owner, payroll is crucial for financial planning and budgeting. By understanding your labor costs, you can accurately forecast expenses and make informed decisions about hiring, promotions, and raises.

If you don’t have a good handle on payroll, you can subject your business to fines and even lawsuits. It’s essential to get it right — every single pay period.

How To Manage Payroll: Getting Started

Before you start hiring employees and managing payroll, you’ll need to get a few administrative tasks done first. These will ensure you hit the ground running and have a solid foundation on which to build your payroll practices.

Employer Identification Number

As a business owner, you will need to obtain an Employer Identification Number (EIN) in order to file the necessary forms for managing payroll. The EIN is a unique number that identifies your business, much like your Social Security Number identifies you.

This number is issued by the federal government and is needed on any federal and state paperwork, like business licenses and payroll taxes. It should be noted that some states require businesses to obtain their own state identification number as well.

Payroll Policies And Processes

When getting ready to manage payroll, it’s smart to establish your company’s payroll policies and processes.

Your employee handbook should include a section that establishes how employees account for their hours if they’re hourly, as well as overtime payments. It should also specify the pay period, how benefits work and are accounted for, and anything else payroll-related.

If you give your employees options for payment methods, add the details in your handbook. Depending on your business, these methods could include:

• Direct deposit
• A prepaid payroll card
• A paycheck

Let your employees know how to change their payday preferences and what they need to do to update things.

Including all of this information will make the process transparent and predictable so your employees know what to expect.

Payroll Systems

It’s best to set up a payroll system before you start paying your employees. There are several choices depending on how large your organization is and the level of in-house expertise you have.

Let’s look at three possibilities.

Processing Payroll Manually

One choice in processing payroll is to do so manually. This means you are tallying hours and making all payroll calculations yourself.

Although this is an inexpensive solution, it’s time-consuming and mistakes are likely, resulting in an employee’s loss of trust or even legal trouble.

Remember, it just takes one employee’s sloppy handwriting or a transposed hour to affect the entire payroll process. It can throw off your records, cause you to underpay or overpay employees, and impact your tax filings.

Plus, manually processing payroll means you have to keep track of all employee records, tax information, and changes in tax laws on your own. This can be overwhelming, especially if you have several employees.

Using Payroll Software

Another option is to use payroll software. This can be a good solution because once you set an employee up in the system, the software will automatically deposit their payroll per the schedule you choose and submit payroll taxes.

Some payroll software also integrates with time tracking systems, so you won’t have to enter hours manually. Connecting your two systems can save time and reduce errors, so make sure you select one that’s compatible.

You’ll also want to consider the software’s:

• Cost: Some payroll software can be prohibitively expensive, so research and compare prices before picking one.
• Features: Look for key features your organization needs, such as direct deposits, tax filing services, and integration with other software you use.
• User-friendliness: You don’t want to spend hours figuring out how to make everything work. Your payroll software should be easy to use and navigate.
• Technical support: If you have any issues with the software, ensure there’s a technical support team to help. When comparing, note each company’s office hours and method of contact.
• Security: You’ll be handling sensitive information about your employees, so your payroll software must prioritize security.

Engaging A Third Party

Another option for managing payroll is to engage a third party. This external professional will take care of everything — all of the administrative work of setting up, tracking, and paying both employees and payroll taxes.

Since you’re essentially turning payroll over to another company, expect this solution to cost the most. However, it won’t require much thought or effort from you, which can greatly help overwhelmed business owners.

Salary Status: Hourly Vs. Salary

Another important factor to consider before bringing on employees is how they are going to be paid — hourly vs. salary. Federal and state labor laws establish which employees should be paid hourly and subject to minimum wage and overtime.

This is important because miscategorization can result in owing back overtime pay or even subject you to lawsuits.

Pay Schedule

Before paying employees, you need to establish a payment schedule, such as weekly, bi-weekly, monthly, or any other time period that makes sense for your business.

Each has pros and cons, so think about which would be best for you and your employees. You’ll want to consider your:

• Cash flow
• Employees’ financial literacy and preferences
• Payroll procedures
• Processing fees
• Personal preferences
• Company’s size
• Local laws and regulations

Here’s a bit more information about the most common pay schedules.

Weekly

Employees like this schedule because they receive a paycheck each week. Payday is often every Friday, though technically, it could be any day you designate.

However, you’ll be running payroll every single week, which can be challenging. Frequent payroll calculations increase the possibility of errors, so it’s important to have a solid system in place to help ensure accuracy.

Also, if you pay a third-party company a processing fee for each payroll, you’ll pay more often with this option.

Bi-Weekly

This popular payroll schedule issues employees a paycheck every two weeks. Your employees would get paid every other Friday (or whatever day you select.) It’s easy for them to budget, and twice a year, they get a third paycheck in a month, which can seem like a bonus.

On your end, it reduces the number of times you have to run payroll from 52 to 26. This frees up time and reduces the likelihood of errors. However, it can create cash flow issues in those months with three paychecks if you aren’t careful.

Semi-Monthly

With a semi-monthly payroll schedule, your employees will get two monthly paychecks. Many companies pay on the 1st and the 15th. Others opt for the 15th and the last day of the month.

Since this option is so consistent, it’s easy for your employees to budget. They get 24 paychecks a year.

It also streamlines payroll since it’s only done twice a month. But you’ll run into potential problems in months when payday falls on a weekend or holiday. You must have a clear procedure, so your employees know what to expect.

Monthly

Typically reserved for salaried employees, some companies pay once a month, typically on the last day. And while this schedule means you’re running payroll less frequently, it’s potentially the most challenging.

It can be hard for employees to budget when they only receive one paycheck a month, especially if they previously got paid more often. There may be a learning curve and some frustration.

You’ll also have to be extra diligent in ensuring all hours and deductions are accurate before running payroll. It’s a lot of data to go through at once.

And since each paycheck will be for a whole month’s worth of work, your company needs stable cash flow for this option.

Recordkeeping Process

In order to comply with federal and state law, it’s essential to keep accurate records of your employee’s hours, wages, payroll, and withholdings.

The U.S. Department of Labor is very specific about which records to keep and for how long. Make sure whatever payroll system you set up complies with all legal requirements and gives you a way to store that data for several years, in a secure manner.

Deduction Management

Under federal law, employers must withhold certain deductions from their employees’ paychecks.

These deductions include federal and state income taxes, Social Security and Medicare taxes (collectively known as FICA), and any court-ordered wage garnishments or child support payments.

Other voluntary deductions could include:

• Retirement contributions
• Health insurance premiums
• Life insurance premiums
• Union dues

Have a plan for handling these deductions, and communicate them clearly to your employees. They must understand what’s being taken from their paychecks and why. Otherwise, they may have concerns that could result in confusion, frustration, or even complaints.

Timekeeping System

You’ll want to set up an easy-to-use timekeeping system so that you can plan and track both employee hours and productivity. Although your system can be manual, like with paper timesheets, these are prone to errors and can be time-consuming to compile and verify.

Software solutions like Inch, on the other hand, can be welcome additions when it comes to timekeeping. With Inch, you can schedule, track time, and manage tasks and labor costs, making workforce management simpler and easier.

It also has features to help prevent time theft, such as geofencing tools and clock-out control. These make it more likely that employees accurately record their hours and help prevent discrepancies and fraud.

Timekeeping systems like Inch also generate detailed reports for payroll purposes, making the whole process more efficient.

How To Manage Payroll: Expert Tips

Now that you’ve got everything set up and all of the important decisions made, it’s time to manage payroll like a pro. Here are a few of our expert tips.

Research Wage Laws

Our first tip is one of the most important: Have a good understanding of both federal and state wage and labor laws that apply to your business. These do change, so keeping abreast of the latest developments will help your business run smoothly.

Train Your Team

Sharing is caring. Be sure to share all of your knowledge and train your team on applicable laws and regulations around employees and managing payroll.

In addition, as you onboard new hires, communicate the policies and processes of payroll right from the beginning to avoid any misunderstandings and confusion.

Open A Separate Bank Account

Consider opening a separate bank account just for your payroll funds. This ensures you don’t accidentally spend them on a different business expense.

It can also help you keep track of your payroll taxes, making it simple to transfer funds to the government when it’s time to pay.

Establish A Payroll Administrator

Running a business requires you to have a handle on a whole host of things. Having a payroll administrator can help you keep all things payroll-related straight.

If you can’t afford to hire one right away, at least establish a point person for the task within your current team.

Engaging or assigning a payroll administrator will relieve you of the day-to-day burden and allow you to oversee the process rather than always be knee-deep in it.

Double-Check Your Work

Before submitting payroll to your employees, always double-check all the numbers and make sure they are correct. If you see something that looks unusual, investigate further.

It’s better to catch any errors before payday than afterward.

Make A Payroll Calendar

You’ll want to create a payroll calendar to ensure that you are paying your employees on time, as well as any taxes that you owe. A good payroll management software will often have this as one of its features, making it easier for you to track.

Be A Great Recordkeeper

Given the importance of payroll and accurate information, set up an effective record-keeping system. Federal and state laws require that you be diligent about tracking hours, withholding, and payroll payments made.

This information will have to be kept for a period of time in case anything comes up that will require documentation.

Make Updating Easy

Changes happen. Whether an employee closes one bank account and needs to update their direct deposit or someone gets married and changes their name, your payroll management system needs to make updates easy and efficient.

Consider implementing an online portal where employees can easily access and update their personal information. This reduces the burden on HR and can minimize the risk of errors.

Plan For End-Of-Year Paperwork

Each January, you must prepare W-2 forms and 1099s (for any contractors). You could miss the federal deadline if you wait until the last minute, so have a plan to get them done.

As a part of this process, review all financial records so you can resolve any issues before the end of the fiscal year.

Secure Your Data

When you’re a business owner, you end up with a lot of sensitive information about your employees, including their social security numbers.

Establish strict controls around this information, including who has access to it and how it’s maintained and stored.

If you’re working with hard copies, this could mean having a special paper document storage area that’s secure. Inside, you might have locking file cabinets and confidential shredders.

Consider using encrypted storage for digital data and restrict access to only authorized personnel. Regularly check for updates and patches to your software to ensure maximum security.

You’ll also need a plan for backing up your data. That way, you won’t lose everything if there’s a security breach or a technical issue.

Keep An Eye On Cash Flow

When you manage payroll, you will see how much money is being spent on staffing each pay period. You should be aware of spikes in hours and overtime, and be sure that these expenses are sustainable compared to income.

If you see a problem or a pattern that gives you pause, you can speak with managers and adjust operations to avoid any cash flow issues.

Have A Plan In Place For Disputes

No matter how careful you are with your payroll records, you may still face disputes from employees or contractors. Have a clear plan for addressing these conflicts, including how to handle investigations.

A clear dispute process means that If a problem arises, you won’t have to waste time figuring out what to do next.

Audit Regularly

For anything important, it’s always good to get an outside eye. By conducting periodic payroll audits, you can get ahead of problems with recordkeeping or any other administrative systems.

Payday Perfection

As you can see, managing payroll for a business is no easy task. It requires a lot of information and decision-making prior to even onboarding your first employee.

Now you have a host of expert tips that can help you manage payroll like a pro — including knowing the law, training your team, and conducting internal audits.

Many potential pitfalls may also be alleviated by using workforce management software for keeping schedules, tracking hours and productivity, and managing labor costs.

Inch is that all-in-one solution for hourly workers that will save you hours while making your payroll more accurate, giving you, the business owner, more time for building your business.