8 Effective Payroll Tips for Small Business Owners

Even on the leanest and most tightly run teams, payroll can be a tough process to unravel. For example, it can be more difficult to maintain strict employee privacy. Underpayments and overpayments are more common and harder to detect. Accuracy, standardization, backup systems, and other requirements can be overlooked and possibly trigger a time-consuming audit.

In a recent survey conducted by payroll services provider OnPay of more than 1,000 small businesses, business owners who run payroll manually said they spend an average of 18 hours a month paying employees. Despite this fact, most payroll advice is geared toward larger organizations, so that information isn’t helpful when you’re looking for ways to make your lean team more efficient. 

Here are eight tips for streamlining your payroll process and keeping your records neat and orderly to save you time each month and around tax season:

1. Create and maintain a payroll calendar

If you’re only willing to do one thing in order to organize and simplify the payroll process, make it this one. Ensuring that all employees get paid on time is one of the cornerstones of both keeping your team happy and keeping payroll in check. Weekly, bi-weekly, monthly — it doesn’t matter as long as you have a system in place. 

Perhaps the best part of it all is just how easy and accessible finding and maintaining a payroll calendar can be. The National Finance Center offers pre-made, downloadable calendars for anyone to use. Just keep in mind that the pay schedules of your business may not align perfectly with the calendars you find online. Consider making your own in order to best reflect the practices of your business without losing track of when the next payday is. 

2. Automate payroll-related taxes

Automating payroll taxes sounds like something you could do just to ease the burden of payroll management. It’s actually much more consequential than that.

The penalties for missed tax payments can be significant. Attempting to handle them all manually is just asking for a slip-up at some point. Paying taxes just one day late will result in a penalty of 2%. That penalty quintuples to 10% after 16 days. Mistakes like these may sound unthinkable, but manually paying taxes keeps the risk far too high. The sooner those payments get sent off to the IRS, the less you’ll need to worry about them.

Several leading payroll providers and software packages offer automated payment of taxes as a feature. Since you’re dealing with the IRS here, be careful to read the fine print, though. If your software package hiccups or your payroll provider misses a cue, the IRS will come looking for you, not them. Be certain that whatever arrangements you settle on are verifiable, guaranteed, and will survive an audit.

3. Classify all workers

The pay schedules of your workers will vary significantly based on their classifications — as will the tax implications for your business. It may sound obvious, but the lines between an independent contractor and a full-time employee can get pretty blurry, particularly for small operations on tight budgets.

There’s no simple solution out here: you need to do your due diligence in assessing and classifying each of your employees. You can use the IRS’s classification guide to help assess whether they are an independent contractor or a full-time employee, just be sure to incorporate all of your classifications back into your payroll system — that way no key distinctions can slip through the cracks. 

4. Do data entry double duty

Big businesses have entire payroll teams or can outsource the whole process — not so with their leaner counterparts. Establish whatever payroll process works best for you, but always have a second pair of eyes to watch data entry. An extra zero now could spell endless headaches for you down the line. 

Enter, run, and crunch the numbers twice over in order to make sure nothing like that happens. To make this easier and less time-intensive, be sure to include it as part of your monthly plan review meeting. This can ensure that you have more eyes on the data and have time set aside to give it a full run-through. 

5. Find the right software, but don’t use it as a crutch

Payroll software is probably the first place your mind goes when thinking for a quick way to streamline the payroll process, and for good reason. Most software systems are easy to use, cost-effective, and free up time and energy for your business to do what it does best.

That being said, overreliance on payroll software can bring with it a new set of issues. Simply plugging in the numbers and letting the software chug away can leave you unfamiliar with the financial goings-on of your payroll. They can also make data compilation for potential audits that much more difficult. If payroll software works for you, use it — just don’t let it use you.

Should you decide to invest in payroll software, this is not the place to skimp. Make sure you budget an ongoing line item for this expense, that you are familiar with its capabilities, and that you have double-checked to make sure it is compatible with any/all legacy systems your company is using.

This might also be a good time for some out-of-the-box thinking. What other areas of your business might benefit from a higher-end payroll software package? Can the package you’re considering handle billing, invoicing, and other financial processes? It’s easy to acquire tunnel vision to fix one problem, but step back for a bit and take in a wider point of view.

6. Know the law

This one is a given. The rules and regulations surrounding payroll laws can be a bit complicated and often differ from state to state. You’ll want to make sure your business’s payroll system is in compliance with the law from the get-go, and the American Payroll Association’s guide to state payroll laws can help you do just that. If you’re feeling bogged down in all of the rules, don’t hesitate to contact an expert — better to figure it out now than suffer consequences later.

7. Appoint a payroll manager

“Payroll manager” is generally thought of as a full-time position at most companies. One that requires sorting through all the ins and outs of a large business’s pay complexities. For lean teams, the responsibilities aren’t nearly so demanding but they are just as important. 

If a member of your team has any experience in accounting, HR, or business finance, consider asking them to take on some payroll management duties. In conjunction with a good software system, these duties are unlikely to pose a significant challenge to them if you give them the proper support. Even if you need to enlist more than one employee to help out, having one oversee the whole process can make things significantly more efficient than trying to patchwork through it all.

8. Keep all records

Keeping payroll records isn’t just a recommendation: it’s a legal requirement. Patriot Software reports that businesses must keep records of employment taxes for up to 4 years, payroll records for 3, and wage determination records for 2 in order to stay in compliance with the IRS guidelines and the FLSA. While software can do some of this for you, it’s best to maintain your own physical and digital records as well to minimize the chance of loss. 

Tackle payroll early on

Payroll is always a headache, but following the right advice early on can soften the blow later on. Small businesses have enough on their plates as it is; keeping things simple with payroll can prevent anything else from getting added onto them.