Getting Started With Payroll
It doesn’t matter whether you have 2 or 20 employees, there are multiple considerations as you approach the challenge of payroll. The same laws and protocols will apply, and you’ll need to find a system that can carry out your operations smoothly and reliably.
It’s imperative that you have a plan. I remember my first experience working for someone who didn’t have a payroll plan in place: it was the summer of 1998, and I was working for a custom home builder in Utah. The owner of the business was a nice man who always took the time to say hello when he saw us on job sites. He even bought us lunch a couple of times.
But as the saying goes, “The road to hell is paved with good intentions.” This business owner may have been a chum, but he was awful at fulfilling his payroll duties. After several weeks of missed payments and hasty apologies, the word “payday” became obsolete. Our best hope was to have a “paymonth.”
The primary issue for this construction company’s payroll incompetence wasn’t working capital. Rather, it was the fact that the owner enjoyed working with a form of chaos. His desk was overrun with papers, and the cab of his truck contained all manner of documents. Ultimately, homes still managed to get built—but details such as timely payments to employees simply weren’t possible amidst the disorder.
You can’t afford to run your business the way this owner did. Employee morale plummeted as a result, and turnover skyrocketed. Looking back, I have no idea why I stuck with the company as long as I did—loyalty, I guess. But when an employee’s loyalty is rewarded in such a horrible way, the long-term damage can be significant. Exhibit A of this argument: I’m still griping about this construction company 22 years later.
One of the first steps of your payroll plan is acquiring an Employer Identification Number (EIN) from the IRS. This 9-digit number separates your business from the millions of other businesses in America. Its key purpose is to help with your employment tax identification.
“You have to register your company correctly,” insists a financial analysis from the Forbes Business Council. “Don’t take this part lightly! If you haven’t legally registered your business, technically, your contracts and agreements are not enforceable. I’ve seen way too many entrepreneurs zoom through the registration process and later find that steps were missed and their business was not registered properly. All business entities are registered at the state level, and then you obtain an Employer Identification Number (EIN).”
To get the skinny on your EIN, check out this resource from IRS.gov. You can also determine if you need to get an EIN by answering the following questions:
- Do you have employees?
- Do you operate as a corporation or partnership?
- Do you file one of the following tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do you withhold taxes on income, other than wages, paid to a nonresident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Nonprofit organizations
- Farmers’ cooperatives
- Plan administrators
- Trusts, except for certain grantor-owned revocable trusts, Exempt Organization Business Income Tax Returns, IRAs
- Real estate mortgage investment conduits
Even a single affirmative answer to these questions means that you need an EIN. So head over to IRS.gov and get cracking.
Next up will be determining whether your workers are employees or independent contractors, if you haven’t done this already. You’ll need to know their status in order to correctly handle things like their pay, Social Security, Medicare, and unemployment taxes. We used a series of questions above to help figure out if you need an EIN, so let’s continue that trend. If you answer yes to any of the following questions, you probably have an employee on your hands rather than an independent contractor.
- Do you control how the individual’s work is done?
- Do you control when and where the individual’s work is done?
- Do you supply the individual with tools or equipment for the job?
- Do you provide health benefits or PTO to the individual?
- Is the employment ongoing, rather than being tied to a certain project?
After determining the nature of your business’s employment and ensuring each employee fills out the proper tax forms, you’ll be set up for an accurate and smooth process. For additional details regarding the necessary tax forms, please visit IRS.gov.
Laying Out Your Payroll Processes
Now that you’ve covered the groundwork, it’s time to focus on the nuts and bolts (looks like I still have that construction job on my mind). First off, how often do you plan to pay your employees?
From a practical standpoint, a lower number of pay periods equals a lower number of payroll headaches. But try telling your employees that you’ll be doing semi-annual pay periods and see how they react. On the other end of the spectrum, most workers love weekly pay, but that greatly increases the payroll effort required—so many small businesses settle for a biweekly schedule.
Of course, there’s more than just employee morale to think about. You might be legally required to adjust your payroll plans based on the state where your business is based.
“Choosing the right pay schedule may seem like a simple decision, but there are some important factors that go into it, including employee attitude, Department of Labor regulations, payroll cost, and taxes and benefits,” explains small business expert Matt D’Angelo. “The first step toward choosing the right schedule for your business is analyzing what type of employees you have…Once you’ve considered what’s best for your employees, visit the Department of Labor’s website to see the payment requirements in your state. Laws vary by state and pay period type. Some states, for example, don’t allow for monthly pay periods.”
Figuring out your pay schedule is an important accomplishment. You’ll then need to confirm that you’ve locked down other potential factors that will ensure accurate paychecks and a streamlined process. For example:
- How do you track employee hours?
- How do you track PTO?
- How do you track overtime pay?
- How do you make deductions for benefits?
- How do you make deductions for taxes?
- How will you store your payroll records?
While this list is far from comprehensive, it might still seem overwhelming to those in the early stages of figuring out their payroll plan. The good news: you don’t have to figure out all these details on your own. Guided by your business mentor and a trusted tax professional, you can navigate the process and reach decisions that are good for your business and your employees.
You should also be aware that a good payroll service will handle most of these details for you—so instead of sweating the small stuff, let the experts and their technology elevate the process for you. When implemented correctly, a payroll service will save you as much time as it does money.
Choosing a Payroll Service
Your first order of business: deciding whether to go with an in-house solution or outsourcing. If your business is on the smaller side, it’s typically more affordable to enlist the help of an outside expert. They will have all the resources and experience needed for a job well done. And you’ll only be on the hook for paying them when they’re dedicating their time to your business rather than having them on your payroll day in and day out.
As your business grows, you might consider bringing in your own payroll professional. This in-house approach is nice because the person administering your payroll will be intimately familiar with your business. This closeness to the details can help to reduce confusion and resolve issues faster.
If you decide to go with an outside solution, there’s no shortage of payroll services in the US. You can go with your choice of a major company, such as ADP or Intuit, or look for a smaller local solution. There are pros and cons to either option. Let’s look at some of the main considerations:
Major Payroll Company
One of the biggest advantages with this approach is breadth and depth. A bigger company has more specialized teams to handle the various elements of your payroll, sometimes leading to better efficiency and more accurate results.
On the flip side, you might just be a faceless number to some of the nation’s bigger companies, and their customer service could be lacking. Also, a nationwide operation is less likely to understand the nuances of your local tax regulations.
Local Payroll Company
As a small business owner, you’re well aware of the benefits of a smaller operation. You’ll usually get a more personalized experience with a local company. You can get more 1-on-1 time with your contact at the business, and the customer service will be better when you run into issues.
Possible drawbacks of this option include a more limited suite of payroll offerings and slightly less refined processes.
The best way to find your ideal payroll service is to reach out to your professional network. Ask colleagues in your industry which companies are reputable and which to avoid. Read reviews from trusted sources. Seek out your business mentor’s opinion.
After narrowing down your list to 2–3 top contenders based on the collective wisdom of others, it’s time to find the option that makes most sense for you. You might find that 1 of the businesses has a brand personality that really jives with your business. Or perhaps they offer a particular service that the others don’t.
Here are 5 additional factors to consider as you make your final decision:
1. The Cost
You can expect the price of a payroll service to depend on several factors: first is the number of employees. Next is how often you’ll be paying your employees—and it’ll also matter which of the service’s features you’ll be using. It’s common for a payroll service to charge you an overall account fee each year, as well as an additional fee each time a new paycheck is sent to an employee.
Another “cost” to consider: how much of your time and brain space the service will require. If the service is an optimal fit for your business, it will substantially reduce the hours you dedicate each month to payroll. Likewise, it should also require less of your energy. If your payroll service isn’t delivering these types of savings, the cost is actually much higher than what’s listed on the price tag.
2. Confidence With the IRS
When payroll tax mistakes occur, the IRS will come knocking on your door, regardless of whether the payroll was administered in-house or by an outsourced service. So if you’re going with the outsourced route, make sure the service will back you up in the unfortunate occurrence of errors. Many payroll companies even offer to pay the tab for any penalties that result from mistakes they might make.
3. The Automation Factor
With its recurring functions and data-heavy nature, payroll is primed and ready for automation. Each task that you can turn over to technology will save you time.
“As a small business owner, you’re probably looking to save as much time, money and labor as you can,” explains Entrepreneur. “Saving is the name of the game. However, while it might save you slightly to do certain things yourself, your time is valuable. Certain processes are cheaper, more efficient, and more effective when automated.”
Not only do automated tools take tasks off your plate, but they also make fewer mistakes than humans do—so with a good automation solution, you’ll also enjoy a healthy dose of peace of mind.
For example, Sunrise’s Gusto handles many of the tasks related to your business’s ongoing payroll efforts. Your payroll taxes are calculated for you, then filed and paid. Most entrepreneurs see a noticeable reduction in the time they have to spend on payroll each week. And if you’ve opted to outsource your payroll, your automated solution will sync up and make data exchange simpler.
4. Get Your Budget in Order
No matter how you decide to tackle it, payroll will always be 1 of the biggest expenses for your small business. When you account for all the components of pay, such as salary, commissions, bonuses, taxes, and benefits, it’s no wonder that many businesses report that payroll is by far their largest expense.
Given the gravity of the situation, you should consult with a financial professional on how to set a realistic budget. Get your business mentor’s opinion on the subject as well. Payroll will always be a burden, but establishing a budget in advance helps ensure that you’re able to manage it.
5. Make Some Brilliant Deductions
We just finished talking about how significant your payroll expenses can be, so it’s time to highlight how you can often recoup some of those expenses in the form of payroll deductions. The following costs can be written off, which lowers your tax bill:
- Online payroll tools
- Employee wages
- Benefit programs
- Employer’s share of payroll tax payments
The only way to claim these deductions is to have proof of the expense, which is why a reliable system is so important.
Implement Your Payroll Plan
You’re probably already doing many of the things referenced in this guide—but there are always opportunities to enhance your efforts and find new solutions. Take note of areas where you can improve, then set goals for integrating them.
By preparing a payroll plan and enlisting the help of experts and technology, you can turn what has traditionally been a colossal headache into something far better. You’ll probably never write a love letter to payroll, but when handled correctly, it can become something that consistently moves your business forward instead of holding it back.