Getting payroll right is essential to keeping employees happy and productive. It’s also a major expense with no room for error. Complicating matters, payroll teams have a tremendous scope of responsibilities — cutting paychecks barely scratches the surface.
Given the many considerations required to manage payroll, any business can benefit from tightening up its process. The following 15 payroll tips and tricks can help companies of all sizes manage payroll more effectively, from carefully following wage laws to streamlining processes with the right payroll software.
What Is Payroll?
The term “payroll” has a few meanings, but it typically refers to the entire process of paying employees. Payroll includes a multitude of moving parts that extend far beyond making sure workers are paid correctly and on time. For example, payroll requires keeping up with continually evolving tax and wage laws, paying payroll taxes, maintaining required records, handling benefits, ensuring there’s enough cash on hand to cover payroll expenses and even keeping employees satisfied.
15 Payroll Tips and Tricks for Businesses
Effectively managing payroll requires careful consideration of many different variables. For new businesses, payroll’s scope can be surprising. But even well-established companies can benefit from a refresher course to make sure nothing slips through the cracks. The following tips and tricks can help efficiently manage payroll while minimizing the risk of costly errors.
Get an EIN. Any business that has employees or plans to hire them must have an employer identification number (EIN). The IRS uses a business’s EIN to track payroll tax payments and business income taxes. Firms that expect to hire employees at some point benefit from acquiring an EIN sooner rather than later. That way, hiring can take place immediately when you’re ready and find the right person.
Businesses can get an EIN for free from the IRS. The fastest way to do so is online at the IRS website, but businesses can also apply for an EIN by fax, mail or telephone. The application process is generally straightforward and requires the applicant to have a valid taxpayer identification number, be it a Social Security number (SSN), individual taxpayer identification number (ITIN) or a different EIN.
Set a budget. It’s important to clearly understand what impact payroll expenses will have on your company’s financials — after all, businesses must always have enough cash on hand to pay employees in full and on time. But payroll is a major expense, often higher than employers anticipate. On top of an employee’s salary or hourly wage, for example, employers are legally required to match the Social Security and Medicare withheld from the employee’s pay (equivalent to 7.65% of gross pay).
Payroll taxes may be higher or lower depending on the state, and some states have additional employment taxes to consider. Further, companies that offer benefits like health insurance or a 401(k) match must also take costs into consideration. Combined, taxes, benefits and other expenses can add about 15% to 20% to a business’s total payroll costs.
To budget, it can help to calculate total payroll costs as a percentage of revenue to make sure the expense won’t negatively affect company financials. Payroll’s average percentage of revenue will vary across industries, so businesses can look at the wage costs of successful publicly traded competitors.
Accurately classify workers. To pay workers properly — and comply with IRS and state requirements — you must classify them correctly. Workers are typically as employees or independent contractors, depending on the business and its needs. Misclassification, such as incorrectly classifying an employee as an independent contractor, can lead to significant tax penalties. This is because businesses must comply with tax contribution and withholding laws for, but not contractors.
Each employee, whether full-time or part-time, must supply the employer with an IRS form W-4, while independent contractors must file form W-9. Businesses unsure of how to classify workers can fill out and send IRS Form SS-8, Determination of Worker Status for Purpose of Federal Employment Taxes and Income Tax, to the IRS.
Decide whether employees should be hourly or salaried. Workers classified as employees must further be categorized as hourly or salaried. Hourly workers are protected under the Fair Labor Standards Act (FLSA) and therefore must earn overtime pay for working over 40 hours in a week. Salaried workers, on the other hand, may be exempt from FLSA overtime laws.
Companies often find it easier to salary employees because it keeps payroll expenses consistent — employees are paid the same amount each month, regardless of how many hours they work. But in order to be salaried, employees must meet specific job duties and other requirements established by the Department of Labor. Other times, hourly wages just make more sense. For example, hourly wages generally offer managers more flexibility when setting employee hours, which can be a benefit for positions that don’t have consistent scheduling needs.
Create a payroll schedule. Setting a payroll schedule that works with your business’s cash flow needs can help prevent cash flow crunches, but it’s also important to make sure you comply with all federal and state laws, because payroll schedule requirements can vary. No matter what, the chosen pay period should be consistent. Employees rely on their paychecks, so any irregularities can hurt morale.
Biweekly pay periods are most common, but some businesses pay employees weekly, monthly or even semimonthly. Running payroll less often can mean less paperwork, but employees may prefer to be paid more often. Consider a pay period that works best for your cash flow requirements and employees’ needs.
Stay current with labor laws, payroll rules and tax requirements. Tax regulations ensure companies are paying the right amount of employment taxes, while labor laws aim to help protect employees’ well-being. Both types of law exist at the federal, state and local levels, and all are subject to change. Failing to comply with any changes can lead to incorrect employee pay calculations and/or tax liabilities, either of which can lead to significant fines and penalties. Missed deadlines may also result in penalties. Labor law missteps can lead to issues with the Department of Labor, hurt employee morale — and even lead to lawsuits by those who feel they’ve been wronged.
Businesses have little choice but to maintain a clear understanding of all wage laws and tax responsibilities, regardless of how often they may change. To help, routinely do your due diligence and keep a calendar of important tax deadlines. It’s often worth hiring a dedicated payroll provider that ensures clients stay current with labor laws and payroll rules.
Keep policies simple and clear. The more complicated payroll-related policies surrounding attendance, paid leave and benefits become, the more complex the payroll process will be — and the less likely it is that employees will be able to easily understand your policies. Establish clear guidelines, including exactly how and when employees will be paid, plus any additional considerations, such as how expense reimbursements work and rules around benefits eligibility and paid time-off.
Create and maintain a clear, concise payroll policy document, and update it as often as necessary. Be sure all payroll policies are easily accessible and understood. Consider storing the document in a shared online hub where workers can easily download copies. This way, employees can find the information they need, when they need it, without having to wait for communication with the payroll or HR department.
Be transparent with your employees. Whether due to a miscalculated paycheck or confusion about how certain payroll policies are designed, misunderstandings with employees can harm morale. It’s important they feel comfortable discussing any payroll-related issues with managers to ensure all problems are addressed as soon as possible.
Should a payroll mistake occur, strive to keep an open line of communication with employees to explain the error, why it occurred and what is being done to prevent it from happening again. Beyond damage control, consider payroll policies that transparently explain the payroll process, how employees are classified, how salaries are set and any other important information. Keep it standardized across the information, either in a shared online hub or in the employee handbook. Consider compiling questions frequently asked by employees. An accessible FAQ can help employees access the information they need, when they need it.
Keep thorough payroll records. Keeping thorough, accurate payroll records is an important practice because it can help businesses get a better picture of important information, like payroll costs, absentee rates, productivity levels and tax payments, not to mention protecting your interests in case of a dispute. But certain payroll records are also legally required. Violations can result in costly fines levied by the Labor Department, IRS and state agencies.
Always know which records must stay on file for each government agency and for how long. For example, under the FLSA, employers must keep certain records — employee names, addresses, occupations, hours worked, wages earned — for three years. IRS regulations require all payroll tax records, in addition to other important employee information, be kept at least four years. Meanwhile, states might have their own record requirements. Keep clear and accurate records in a safe, easily accessible location.
Always double-check data entry. Unfortunately, payroll mistakes happen. Something as simple as an incorrect keystroke can cause costly errors and lead to tax and labor compliance penalties, not to mention employee dissatisfaction. Double-checking payroll data entry can help businesses avoid expensive mistakes. In addition, accurate facts and figures can inspire greater data confidence and enable businesses to make better informed analyses and decisions.
Before running payroll, always review time sheets, payroll calculations, tax information and benefits calculations. Pay close attention to all IRS forms and other employee documentation. It’s worth checking employee details for accuracy after hiring, including verifying their full names, addresses, dates of birth, pay details, tax file numbers and any other relevant information.
Simplify processes. Given the many calculations required to run payroll, the task can be a headache for businesses. Yet payroll is time-sensitive, so there’s no room for delay. Simplifying payroll processes whenever possible — without cutting corners — can help businesses save time and money while keeping employees happy.
Whether by hiring a dedicated payroll team, using payroll software or outsourcing the task altogether, efficient payroll management can help businesses optimize performance and cash flow. For example, using direct deposit can eliminate the need to cut paychecks; more on this below.
Payroll software can automatically perform calculations, increasing speed and avoiding human errors. And outsourced payroll operations are well-equipped to stay on top of any changing tax or wage laws.
Use direct deposit. Paper pay stubs are already falling out of favor, but it’s worth reminding businesses that have yet to make the switch about the cost-saving convenience of direct deposit. Direct deposit means funds are automatically distributed to employees on payday, eliminating the possibility of checks being lost or stolen. And with the right payroll software, electronic pay stubs can be automatically generated and sent to employees.
Direct deposit is set up through your business bank provider or payroll service. Once the initial setup is complete, you’ll need to acquire each employee’s bank account number and routing information. If your company offers both paper paychecks and direct deposit, consider explaining to employees the benefits of going paperless.
Invest in software. Payroll software can play a critical role in managing this process more effectively. Various solutions are available, but most will automate the aspects of running payroll that are both tedious and prone to human error, like making calculations and withholding and filing taxes. Automating these processes frees up time for payroll managers to focus on other tasks. Payroll software may also automatically trigger direct deposit payments.
Take care when choosing payroll software. Beyond investing in a solution that matches your budget, consider other key points, such as how intuitive the software is, whether there’s an employee self-service option that allows workers to access and update their own information as needed, integration with other financial systems and how much control the payroll team will have over the process. Selecting a payroll solution that integrates with other key business software, such as accounting and HR systems, can further streamline business operations.
Automate taxes. Taxes are complicated. To start, employees have different tax obligations depending on their incomes and withholdings stated on their W-4 forms. Employees must pay FICA taxes that fund Social Security and Medicare, plus federal unemployment taxes (FUTA) and other additional state and local income taxes and fees. To some degree, human error is inevitable. But miscalculations and errors can be extremely costly.
Use a payroll service or solution that automatically calculates and pays federal, state and local taxes. Ideally, payroll software can tally each employee’s individual tax obligation based on W-4 data, plus any additional federal, state and local taxes. This can save payroll teams time and money while keeping the company compliant with tax laws and requirements.
Integrate systems. A major benefit of modern business technology is the ability to link different software solutions to streamline operations across departments while making it easier to get a big picture overview of the business’s health. For example, payroll management solutions can be integrated with accounting and HR management systems to streamline payroll processes. Without integration, payroll teams may need to enter certain data not only within payroll software but also in accounting software. Integration keeps all relevant databases updated in real time, while providing important business insights, such as how payroll affects cash flow.
When choosing a payroll software solution, ask whether it can integrate with other business solutions to simplify and streamline certain payroll-related tasks. Often, solutions can be connected via APIs, but overall business management suites with payroll, accounting, HR and other core business solutions are also available.
Managing payroll is no easy feat, even for small businesses with only a handful of employees. With various tax regulations and wage laws to consider, on top of individual employee pay rates and benefits preferences, companies are hard-pressed to keep payroll operations running like well-oiled machines. For that reason, choosing a human resource management system (HRMS) that helps manage payroll and following the above payroll tips and tricks can help businesses — both new and old — refine their payroll processes for a greater chance of success.
How do you manage payroll effectively?
Managing payroll effectively requires several key steps:
- Track employee hours for a designated pay period.
- Calculate gross and net pay according to hours worked or salary and relevant tax laws, withholding requirements and benefits.
- Pay, whether via paycheck or direct deposit.
- Remit payroll taxes and other expenses.
- Keep thorough records and double-check for accuracy.
To help the process run smoothly, create a payroll calendar and stick to it. Always pay attention to payroll tax and labor law changes. Consider using payroll software that will help streamline the process via automation.
How do I learn basic payroll?
There are a few ways to learn basic payroll. To start, research all relevant payroll laws and taxes. Doing your due diligence is arguably the most important step because any mistakes can lead to costly errors. The IRS offers many articles to help business owners understand the basics of federal payroll taxes and record-keeping requirements for businesses of all sizes and industries. It’s also a good idea to research your state’s payroll tax and labor laws.
As for the ins and outs of paying employees, talk to your business accountant. Ask for guidance on how to handle payroll and payroll taxes, and consider covering some big-picture questions, like how much you should budget for payroll.
Furthermore, you can take online courses and programs that offer payroll training. For example, the American Payroll Association offers various training options to help payroll newbies and payroll professionals alike.
How do I succeed in payroll?
Payroll is much bigger than simply paying employees on time. While that is a vital component, success requires focusing on other factors, including protecting employees and the business, complying with payroll tax requirements and labor laws, managing cash flow and focusing on how to optimize business performance by appropriately scheduling employees.
How do small businesses manage payroll?
There are three main ways small businesses manage payroll: in-house, outsourced or with payroll software. Manual, in-house payroll generally relies on using spreadsheets and/or online payroll calculators to determine tax withholdings and calculate paychecks. This can be time-consuming given the fact that each employee likely has different calculations, not to mention the need to carefully track tax and labor regulations. Manually running payroll can work for businesses with few employees, but it’s not an ideal long-term solution.
Another option is to outsource or hire a payroll company to handle the payroll process. The outsourcing company handles all calculations, distributes paychecks or direct deposits and may even handle tax payments.
Payroll software offers a “best-of-both-worlds” solution by allowing companies to streamline and automate the payroll process in-house. Payroll teams can retain control over the process, but payroll becomes less time-consuming and error-prone. Payroll software usually automates all calculations, and some software can even automatically pay taxes and employees.