6 min read How to Effectively Manage Payroll for your Business
If there's one aspect of business administration that should run smoothly at all times, it's the payroll process. Mistakes are not only embarrassing and time-consuming to fix, they're inconvenient for the employees who are working hard to help the company meet its goals. In some extreme cases, they can even result in legal entanglements that you would do better to avoid.
There are many ways to streamline the payroll process, thereby cutting down on these costly errors. Here are a few well-considered tips to help you manage the process. While every company is different, you can tailor this basic advice to suit your individual needs.
Set a pay schedule
Before you can even begin to manage payroll, you'll have to work out a schedule for paying employees.
First and foremost, you should set a regular pay period. A pay period is defined as a recurring time cycle over which employee labor is recorded and paid. Whether you adhere to a weekly or biweekly schedule is up to you, but either way, consistency is key. Make sure the employees are made aware of the pay schedule upon hiring.
If you have salaried employees, they can be paid on the same schedule as the hourly workers, or you can work out an entirely separate pay schedule for them. Using the same payroll schedule is recommended, as it will help you save time. Payroll software systems can be set up to include salaried employees, so there's no danger of you forgetting to administer their checks on any given payday. Whichever method you choose, it's a good idea to keep track of the hours worked by the salaried individuals, just in case your business is audited at some point in the future.
Make sure to obtain an EIN
Any business that pays employees is required to have an Employer Identification Number (EIN) on file with the IRS. This nine-digit number will be unique to your organization, and is used to report your employment taxes to the federal government. You can obtain an EIN by applying through the IRS website.
Some states require you to obtain an EIN for their tax databases as well. Check your state resource websites to find out if yours is one of them. These resources should also include instructions on the application process.
Have all the employee paperwork in order
Before an employee can be paid for his or her work, they'll need to fill out a W4 form. Another tax-related payroll resource, the W4 allows employees to list the number of dependents and allowances that they'll be claiming on their federal tax returns. Since dependents decrease the amount of tax that the employee is required to pay, this information will let the payroll software know how much to withhold from each check.
Decide on a calculation method
As we mentioned earlier, how you manage payroll will depend largely upon the needs and function of your business.
Some employees might be offered a fixed salary, while others work for an hourly wage. Others might be paid on commission—or in the case of servers and bartenders, make the majority of their money in tips. The manufacturing industry will often pay workers on a piecework basis, so that their income is based on output. The sooner you put the system in place, the easier it will be to pay your employees in an efficient and timely fashion.
While the administrators of some smaller businesses might feel comfortable calculating their payroll manually, we don't recommend it if your company employs more than 10 people. The process can become too confusing, not to mention time-consuming. Since businesses of this size typically use computers for the majority of their bookkeeping, it should be easy enough to use one for your payroll duties as well.
These days, there are a number of software programs available that make it much easier to manage payroll. These programs calculate both state and federal taxes, take care of withholdings such as health and life insurance, and can be linked to employee bank accounts for direct deposit. When used in tandem with a time clock software program like ClockInEasy, the road to payday becomes even smoother.
Assign the payroll administration task to a designated employee
Many owners prefer to track and manage payroll themselves. This is a safe and effective way to go about it, especially since the task requires some degree of access to the company's bank accounts.
That said, it's a good idea to train at least one other person to manage payroll. Why? First of all, you might not always be around to do it. If you're out of the office on the day that payroll is usually processed—whether it's for vacation, a sick day, or some other reason—you can rest easy, knowing that the task will be taken care of in a professional manner.
Since payroll processing and the related bookkeeping tasks typically only take a few hours per week (depending on the size of the company), the chore should be delegated to a trusted in-house employee. Human resources professionals are often well-equipped to manage payroll, as they're trained to keep sensitive information to themselves. Otherwise, choose someone who has a strong background in accounting and finance.
Delegating the payroll management duties to another person also decreases the margin for error, since you'll be able to look over their work when they're finished. Of course, there may still be weeks when one of you is unavailable, in which case you'll need to take extra care to ensure that the numbers are correct. This is just another example of how time clock and payroll software can make the job that much easier.
Set up a system for calculating and paying taxes
When you manage payroll, you're doing more than just ensuring that the employees are paid on time—you're also withholding taxes that need to be funneled through the proper channels, also in a timely manner.
If you opt to manage payroll using a computer software program, you can configure the settings so that a great deal of the work will be done for you. The bank that's affiliated with the program should send you all the necessary paperwork, which will serve as handy reminders when the due dates are drawing near.
Remember that businesses are required to pay quarterly taxes—unlike most employees, who need only file taxes once per year. Make notes on your calendar to help you prepare, so you're not caught off guard when the time comes.
Consider installing time clock software to help you track employee hours
Instead of asking employees to manually track their hours—which may be inaccurate or, worse, fabricated—you should think about enlisting the aid of a time clock software program.
Time clock software comes with a multitude of benefits, for employers and workers alike. Employees can clock in as soon as they arrive at their work stations, and clock out just as easily at the end of the day. They'll also be able to look back over their hours for the last pay period and alert the administrator about any discrepancies.
For the administrator, these programs make it that much easier to manage payroll. You'll be able to see whether or not an employee has arrived at work, or if he or she forgot to punch out (a common error over which the program, unfortunately, has no control). If you suspect that one of your workers is "padding" the clock by participating in other activities during work hours, the system will make it easier for you to monitor them.
Most programs allow you to add in special codes for vacation days, sick days, authorized administrative leave, or any other paid time off that's authorized by the company. When it's time to manage payroll, all you'll have to do is print out a report telling you how many hours should be entered for each employee. Some will even calculate the minutes into decimal hours—for example, 32:15 will become 32.25 on the report, making your part of the job that much easier.
When it comes to running a business, you have enough to worry about without fretting over how best to manage payroll. With the right preparation and a keen eye for detail, you can turn payroll administration into an enjoyable task instead of an onerous one.
