By Natalie Hoffmann
Starting a small business can be an exciting endeavor, and adding employees as you go can be a satisfying feeling knowing you are expanding and helping your local economy by providing jobs. With employees comes payroll. Many small businesses start out processing payroll on their own through or through online human resource (HR) providers. With a little help from their accountant or tax preparer and the web, they can usually set up these programs to calculate deductions and set reminders for them. But there is a lot more that goes into the payroll experience than just cutting checks.
Your Guide to Payroll
Properly managing your payroll and human capital requires a significant time commitment and at least a basic understanding of several aspects of the process. Small business owners will need to manage the following:
Forms: One of the first steps an employer needs to take when setting up a new employee is to have the proper forms and documentation in place with the right agencies. Those forms could include:
- W-4 – This form identifies an employee’s tax withholding status
- I-9 – This form identifies an employee’s citizenship status
- Benefit enrollment forms with accurate information including beneficiaries
Form management also involves knowing what needs to be signed in acknowledgement by the employee and the employer, and how long the records need to be maintained.
Policies and procedures: Depending on the size of a business, an official employee handbook may be required outlining payroll and other human capital policies and procedures, and requiring a signed acknowledgement of its contents by the employee. A thorough and descriptive handbook is essential to protect both the employer and the employee.
Laws: Human resource laws can be some of the most overwhelming regulations business owners will face. Small business owners will need to spend time educating themselves on federal, state and local employment laws and regulations including from agencies and acts such as:
- Occupational Safety and Health Administration (OSHA)
- Family Medical Leave Act (FMLA)
- Department of Labor (DOL)
- Internal Revenue Service (IRS)
The differences between federal and state labor laws can be significant, but it is important for employers to remember that the law which is most beneficial to the employee is the law which must be followed.
Withholdings: Calculating and processing appropriate tax withholdings and other deductions such as benefits, garnishments and child support are essential for small employers. Knowing the what, when and how of these deductions is crucial to maintaining proper payroll and staying within the line of the law.
Benefits and retirement: Similar to your withholding responsibilities, employers need to remit the correct payments at the right time to their benefit and retirement plan providers. Ensuring proper deductions and remittance will help employers stay in good standing, be able to pay out the earnings, and continue to offer these benefits.
Time and attendance: Having an efficient method and process for tracking time and attendance is crucial to making accurate payroll calculations and can be one of the biggest sticking points for small businesses. Time and attendance is also necessary for managing state and federal overtime rules and for Affordable Care Act reporting for businesses hovering around the threshold of mandated coverage. A proper system also helps curb employee questions and confusion around the official work week, what counts as overtime, and how to manage paid time off.
Taxes and reporting: When you withhold payroll taxes for federal and state requirements, you must remit payments on a schedule to the appropriate agencies. Understanding when and how to remit those payments is crucial to staying in good standing with the IRS and your state agency. If you have multiple employees working across different states, you may have additional tax responsibilities based on where employees work and live and the time they spend in each state. Some states have reciprocal tax programs, some do not. This is becoming increasingly important for small startups operating with remote employees.
Simplify the Process
As illustrated, managing all that comes with payroll requires significant time and energy on the part of the employer, and many small businesses simply do not have the capacity. When the process becomes too overwhelming and the risks become too great, small employers start to look at outsourcing their payroll. By outsourcing, employers gain expertise, management and HR assistance, technological security, and peace of mind. Outsourcing can also help employers offer more benefits like online portals for employees and direct deposit.
Some employers shy away at the thought of outsourcing at first because they believe the costs are too high. However, it often becomes less expensive because the employee or the employer themselves can redirect their efforts to tasks that make the business money, rather than handling the administrative work payroll requires. Additionally, the costs of noncompliance can be very costly in DOL complaints and audits versus paying for outsourcing.
Whether a small employer chooses to handle their payroll in-house or outsource, a lot is at stake. This guide offers a sampling of what a beginner needs to think about when managing their organization’s payroll.
This post is written by Natalie Hoffmann, she is the president of leading complete payroll solutions company HK Payroll Services, Inc. (HKP) and partner at Honkamp Krueger & Co., P.C. (HK). With over 30 years of experience in her field, Natalie has written for several publications on the topics of business, accounting and payroll technologies.