Getting payroll right is one of your central responsibilities as an employer. That holds true whether you’re in the middle of hiring your first employee or planning to bolster your business’s existing headcount.
A recent Bank of America Small Business Owner Report suggests entrepreneurs are constantly considering decisions that could affect how they manage payroll. Many American businesses have been grappling with labor and wage challenges recently. For example, slightly more than half of owners surveyed for the report said they are considering steps to deal with labor shortages, such as:
That gives you a small sense of why paying staff can get complicated quickly. Payroll is never a set-and-forget process, even for owners and managers who have been employing staff and managing business finances for years.
Payroll mistakes can be expensive and time-consuming, as experienced business owners know only too well.
In 2022, EY and Paycom analyzed the costs and risks of payroll errors and discovered the average American company has an 80% payroll accuracy rate. On average, each payroll error costs companies $291 to fix.
Mastering the fundamentals can help your business avoid costly payroll errors. As a business owner, you’ll need to decide whether you will:
Small businesses with fewer employees may want to handle payroll themselves, with the help of payroll software. Much larger employers may be better served by having a dedicated HR department to manage the process or outsourcing it to payroll providers that know their industry.
2. Educate yourself about labor laws
Whether you choose to outsource or keep payroll in-house, you will still need to get up to speed with employment laws. For example, the Fair Labor Standards Act (FLSA) and Internal Revenue Code (IRC), are both crucial for employers.
Failure to comply with relevant federal and state laws can result in fines, legal battles, or negative publicity. You can see key labor laws here.
Then there’s the matter of when you pay your staff. Some businesses choose to pay staff weekly, fortnightly, or monthly.
But it's not entirely your decision. Some states have detailed rules about when — and how often — you must pay employees. (You can view a list of state payday requirements here.) Creating a payroll schedule and a payroll calendar will help your business keep track of key pay run dates.
Payroll software can do much of the heavy lifting, by helping you to automate wage payments, deductions, and pay run requirements. Many payroll software options can also integrate with your accounting tools, to make for less challenging bookkeeping and accounting.
If it's not written down, it can easily go awry. Develop a manual outlining the detailed steps of your organization's payroll process. Include things like:
And if you’ve been employing people for years, you’ll know your employee’s situations can be in a state of flux. People go part-time. They go on maternity or paternity leave. They get promoted. They resign. This is why you need to do a regular audit to ensure each employee has been classified correctly. This will help you ensure every member of your staff is being paid properly — and on time.
Lastly, be sure to keep employees looped into any important changes. Keep the lines of communication open with state and federal authorities too. It’s in everyone’s best interests to ensure employees are paid correctly, and on time. Open communications with your staff and government bodies can ensure you pay only the amount of payroll tax you need to.
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— What is gross pay?
This is the total amount of money you pay your employees before any deductions, such as taxes or benefits.
— What is net pay?
This is the money your employees take home after taxes and other deductions have been taken out.
— What is overtime pay?
This is the additional pay your employees receive for working beyond their regular hours.
— What are paid and unpaid leave?
While there are no federal legal requirements for paid sick leave yet, 14 states have created their own laws providing for different levels of paid sick leave.
— What is payroll tax?
These are the amounts you must withhold from employees’ paychecks and remit to the government to fund programs such as Social Security, Unemployment Insurance, and Medicare. The Federal Insurance Contributions Act (FICA) governs these deductions.