Setting up payroll for your small business is at once a simple and increasingly complex process. To gain a basic understanding, let’s start with the simple part.
If you’re starting up a business, you have to pay your employees, and obviously they will expect their paychecks to be accurate and on time. You will have to choose a payroll schedule that works best for your company.
Once you’ve determined how much and how often you will compensate your employees, you’ll need to withhold a portion of their earnings while also paying for things like health insurance, 401(k) contributions, and workers’ compensation. The government, of course, takes its share in what’s often referred to as the payroll tax for Social Security, Medicare, and federal, state, and local taxes. Employees generally get to keep what’s left over.
As an employer, there’s a laundry list of things for which you’re responsible when it comes to payroll: distributing paychecks and pay stubs; reconciling deductions; depositing and reporting taxes; and inputting new hire information, among other things.
There are many aspects of the process that you should understand when managing a payroll. Here are four of the key aspects:
1. Tax laws. Many federal, state, and local laws and regulations impact the way companies can pay their workers. In today’s increasingly complex tax environment, it’s important to keep up with changing laws and regulations so as not to risk facing IRS and applicable state revenue service penalties.
2. Communication. Employees should be able to understand their paychecks. The more clear and concise you can be about payroll information, the better. Common concerns include how federal income taxes are calculated (factors include marital status, allowances, and how often and how much you are paid); what abbreviations like FICA (Social Security) and MEDFICA (Medicare) mean; why take-home pay is lower (expiration of payroll tax holiday); and how deductions affect take-home pay (depends if it is pre- or post-tax).
3. Technology. There are a variety of providers and technologies available to help with payroll and human resources responsibilities. You should consider how comfortable you are with the payroll process and decide what level of payroll technology help you may need.
4. Accuracy. The accuracy of employees’ pay can’t be emphasized enough. It goes without saying that if you don’t pay your employees accurately, they’re not going to be very happy with you—but there is more to payroll accuracy than that. You must be accurate in tax filing, payroll reports, and all other calculations and deductions. This is another area where technology can come in handy.
Many business owners are tempted to handle payroll on their own. Doing it yourself may seem like a good way to save money, but you should be very aware of what mistakes may cost you in penalties and fines. According to the U.S. Chamber of Commerce, one in three businesses pay an IRS penalty every year. It may be worth your while to consider hiring a payroll services company or Certified Public Accountant (CPA) to help you through this complex task.
Michael Alter is president and CEO of SurePayroll, a wholly owned subsidiary of Paychex. SurePayroll provides payroll services for small businesses.