Running Payroll 101: Tips for New Business Owners
Any business that wants to grow in a demanding market needs employees. Where there are employees, there’s payroll. Although payroll is an essential process when running a business, it causes one of the biggest headaches in business owners.
There’s no doubt payroll is one of the most feared things among business owners, but it shouldn’t be this way. After all, you signed up to be a business owner -- not an accountant. If you wanted to deal with numbers all day, you would’ve gone to school for it.
With that being said, many business owners today still rely on doing payroll manually every month. This might be the way you’ve grown comfortable doing payroll in the past, but it’s not how you should be doing payroll now or in the future.
In order to get through the payroll process accurately and efficiently, you need to have the right tools and resources available to you at all times. As you continue to read below, you’ll learn what some of those tools and resources are, as well as some common tips to help you through the process.
Let’s get started!
Should You Do Payroll Yourself?
Payroll is the process of making sure your employees are paid the right amounts at the right time. It’s the day you get to reward your employees for their hard work, but it’s also a day you can’t screw up because there’s a lot riding on this day.
Whether you have one employee or a team of 100+ employees, payroll is an essential process. It gets more difficult the more people you have, so making sure your payroll process has the ability to scale itself as your business grows is crucial.
In the early stages of starting a new business, payroll is manageable for the business owner to do themselves, but that doesn’t mean it won’t come with difficulties. You’ll need to understand the terminology, payroll tax laws, and basics of running payroll. In addition to that, you’ll have to trust yourself not to make a mistake.
With that being said, it’s always best to involve the right payroll software in your process to ease some of the pressure off yourself. You can also seek the help of a payroll assistant or entire payroll team if you have the cash flow to support it.
Do You Plan on Doing Payroll By Yourself?
If you plan on doing payroll manually, meaning without the help of an assistant or software, you’re going to need to prepare yourself for a tedious process. Each pay period is just as crucial as the next and you have to deliver your employees with a smooth payday.
The process involves four main stages:
- Determining the wages and pay amounts
- Taking into consideration the various taxes, garnishings, withholdings, and other payroll deductions
- Printing and signing the checks to be sent to employees
- Making the appropriate tax payments to the government on-time.
It’s a big commitment to do it manually but does come with its perks. You don’t have the added expenses that come with payroll help and software, as well as the added overhead to your business. At the same time, there’s a bit of a learning curve to it -- much like anything in the business world.
What do you need to do payroll manually?
One of the things that put your business in a tough position when doing payroll is not having the necessary documents and business items necessary. This can cause delays to come payday and put your employees in a tough spot as well.
To ensure you have all the proper documents and pieces of information before starting payroll, we’re going to list the essentials below. First, we’ll start with the business items you need to have in place:
- Federal Employee Identification Number - this number is given to you by the IRS and holds a similar responsibility as your social security number, just for your business instead of yourself. It’s a nine-digit number that you’ll use for everything including federal taxes, hiring, bank accounts, licenses, and permits.
- State and Local Registration - once you make your business official at the federal level, you need to do the same at the state and local level. This will help you pay state taxes, if necessary in your state.
- Workers Compensation - any business entity with employees should consider applying for workers' compensation coverage. It helps pay medical bills, as well as rehabilitation bills when workers are injured on the job.
- New Hires - if you plan on hiring employees to help with your business, you need to report those new hires to the federal and state governments. It’s important to get this done within 20 days of hiring the person.
Now, let’s take a look at some of the information you’ll need from your employees before starting payroll manually:
- Classification - your employees will have different classifications depending on the work they do and their personal lives. Making sure the government knows which employees are exempt and which aren’t is important, as well as whether or not they’re listed as an independent contractor.
- New Hire Documents - having employees and contractors fill out a W-4 form or I-9 form (or whatever form is needed) is essential to the onboarding process when bringing on new employees. You’ll have to make sure everything is filled out completely, properly, and accurately if you want to avoid penalties.
- Payments - there is a wide range of options when it comes to paying your employees and independent contractors. You can offer them all, a mixture of some, or a single option, it’s completely up to you. Depending on which you choose, you’ll need additional information from the employee in order to complete transactions.
If you don’t have all the necessary paperwork and supporting documents filled out ahead of time, there’s a good chance your employees see a delay in getting paid. This is crucial when performing payroll procedures manually and essential to keeping employees happy.
Calculating Payroll Properly
In order to calculate payroll manually, there are several things that need to happen or else you’ll be left scratching your head at the end of the month.
First, you need an effective way of tracking employees’ hours. Second, you need to understand the different types of pay. Finally, you need to calculate the wages.
Let’s take a look at each of these steps in more detail:
- Tracking - managing time and attendance is a crucial part of ensuring payroll is done accurately. Having employees keep track of this themselves can lead to inaccuracies, but certain software can make this a breeze and even automate certain parts of the process.
- Different Types - understanding the difference between gross pay (the amount the employee receives before deductions) and net pay (the amount the employee receives after deductions) is essential before calculating payroll. You also need to understand bonus pay and how that should be recorded and taxed.
- Calculate - now you’re ready to calculate the employee’s wages. If they worked 10 hours at $15/hr., they’ll be due a total of $150. This might change if they’re an independent contractor, but there’s also much more that needs to be done here.
Of course, there is a wide range of taxes and payroll deductions that need to be initiated before finishing payroll. We’ll get more into that in the following section.
Factors That Play a Role When Calculating Wages
If calculating an employee’s wage was as easy as multiplying their hours by their hourly wage, the payroll process would be a breeze for any owner with a calculator. In fact, some owners wouldn’t even need a calculator.
Unfortunately, the process is much more tedious and there is a wide range of factors to consider before being able to call it a day.
Let’s take a look at those factors below.
- Payroll Schedule - your payroll schedule is required when keeping yourself organized as a business owner. You need to know when your employees are to be paid when you need to pay taxes, and when you need to file tax returns. It’ll also help to keep an eye on dates you plan on giving out bonuses.
- Gross Wages - for an hourly employee who is non-exempt, simply multiply hours worked by wage (up to 40 hours per week) as we discussed above. For a salaried employee, divide their annual salary by the number of checks they’ll receive in one year (usually around 26) to determine their pay per payday.
- Overtime Pay - non-exempt employees that work more than 40 hours in a single workweek are subject to overtime pay, which is time and a half. Multiply the number of overtime hours by 1.5 and add that number to their gross wage.
- Wage Garnishments - there’s a good chance you’ll be notified of a wage garnishment against one of your employees. If you receive this notification, it’s important to let the employee know immediately and start deducting that amount from each check. You’ll also need to make sure the deduction is sent to the right agency to avoid a failure-to-respond.
- Benefits Contributions - your employees are bound to sign up for health insurance, life insurance, a 401(k) retirement plan, and much more when you own a business. Making sure these amounts are deducted from each employees’ checks is another crucial factor in the payroll process.
- Federal Income Tax - this needs to be reported and deducted from every check in order to properly calculate the employee’s tax liability at the end of the year.
- Social Security & Medicare - another payroll deduction that must be taken out before calculating the final employee payment amount. You generally pay half of this, while the employee pays the other half.
- Federal Employment Tax - federal (and state, in some cases) taxes are deducted from every employee’s check in order to fund unemployment compensation programs throughout the United States.
Once you’ve taken everything listed above into consideration, you’ll know exactly how much your employee is due. Of course, you’re still far from being at the finish line and now need to find a way to get that amount into the hands of the employee.
Printing Payroll Checks
When you’re printing your own payroll checks, you have two main options -- handwrite them and send them in the mail with a postage stamp (or deliver at work) or receive help from technology to prepare the checks for you.
Obviously, option No. 2 is going to save you a large amount of time -- and hand cramps. It’ll also be a much more safe and practical solution than having to do it all yourself. All you’ll need to do is make sure the checks get in the hands of your employee.
Tips When Doing Payroll Manually
An effective and accurate payroll process is key to any functioning business. Not only does it keep you in good standing with the IRS, but it helps keep employee morale at an all-time high when they receive their checks without delay.
Here are some of our top tips when doing payroll manually and how you can find more success with it:
- Make sure you classify employees properly to avoid confusion and mistakes.
- Make sure all federal, state, and local employment taxes are recorded and paid on-time.
- Make sure payroll is processed on-time each pay period -- make a habit of it.
- Have an effective way to easily track an employee’s hours with limited mistakes.
- Get your employee’s pay to them in the right form, whether they want a direct deposit or a check.
- Take into account bank holidays and adjust your payment schedule accordingly to improve employee morale during these times.
- Always double check your work -- no exceptions.
If you can follow these tips religiously when doing payroll yourself, you’ll put yourself and your employees in a good position when payday comes.
Is Manual Payroll the Way to Go?
Doing payroll yourself has its advantages when it comes to limiting overhead and outgoing expenses. You’ll still have some administrative costs to consider, but they’ll be much lower than having someone else take over full responsibility.
With that being said, doing payroll yourself is only worth it if you can justify the time lost each month managing everything yourself. The hours can pile up and also add frustration to your life that you don’t need as a business owner. Not to mention you live a busy life that might not give you enough time each month.
At the end of the day, you have to weigh the pros and cons when doing payroll yourself. Do you want the added responsibility or do you want to focus more on growing your company? That’s the real question.
What Do You Gain With Outsourced Payroll?
If you’re looking for an easier way of getting payroll completed every month, outsourcing these efforts is one of the most beneficial things you can do -- in addition to having the right software and tools necessary for success.
Here are some of the most prominent benefits you receive when outsourcing your payroll needs:
- Save an enormous amount of time each month.
- More efficiency, allowing you to focus on the things that matter most.
- Save money in the long run while having the time to grow your business.
- A much better sense of security when handling documents and payments.
- Having professional payroll help whenever you need it.
There’s so much to maintain when managing employees’ payroll and it eventually becomes too much for a business owner to handle. This is nothing to be ashamed of and only means your business is doing all the right things.
If you’re ready for a change and want some professional payroll help, contact Consultants In-A-Box today. We have the right expertise and software necessary to ensure your payroll needs are met with astounding customer service.
We can’t wait to help you take this enormous weight off your shoulders!
- Jordan VanMaanen