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How to Handle Employee Payroll as a Small Business Owner

Issuing Payroll means more today than writing a check. It means navigating a complex set of websites to file various taxes, issuing checks, and maintaining employee and company records. Depending on how many employees you have, it could take a few minutes or a few hours each week to complete your company’s payroll. It is time-consuming, and mistakes can result in more time spent unraveling errors as well as money spent on fines and penalties for incorrectly filing taxes.

Some small Business owners are comfortable issuing payroll themselves. Some have an accountant or bookkeeper on staff who handles the myriad and complex tasks related to payroll. Payroll software can make it easier for businesses to issue payroll in-house.

Others find that outsourcing their payroll makes the most sense. No matter which way you choose to go, establishing a simple payroll system in your business makes the task go smoothly.

Payroll Basics

Whether you choose to do your payroll yourself or outsource it, there are still several basic steps all business owners should take to manage employee payroll.

1. Obtain an EIN

EIN stands for “employer identification number.” It is used to create and maintain federal and state tax records. It is free to obtain, and you can apply for one online from the IRS.

2. Check with State and Local Governments for Additional IDs

The SBA reports that some state and local government authorities also required unique identification numbers for record-keeping. Check with your local governing authorities to understand specific requirements for your locale.

3. Keep Accurate Records

Using QuickBooks or another basic accounting program is a smart idea to keep accurate payroll records. Update payroll every time you issue it to avoid falling behind in your record-keeping. Maintain employee records too with each person’s salary information.

4. Determine Employment Status

Clearly define the employment status of everyone completing work for your company. Independent contractors, part-time, and full-time employees have different taxation and benefit requirements. You do not need to pay taxes or social security for an independent contractor, for example; it is their responsibility to pay both. The difference between an independent contractor and an employee can sometimes be a gray area. Learn more about how the IRS classifies each and maintain the proper paperwork for ICs, such as an independent contractor agreement and a W9 form on file.

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5. Establish Clear Pay Rates for Employees

A written job description with the pay rate for the position is important. If there are any questions about what you promised to pay someone, you can refer to their employment agreement or job description.

6. Set a Pay Period

Pay periods can vary from weekly to monthly. The key is consistency. Taxes, record-keeping and other aspects of payroll are easier when you keep to a constant schedule.

7. Submit Taxes

Keep your payroll taxes up to date. Fines can add up. Most need to be submitted quarterly or annually. Publication 15 from the IRS can help you identify payroll taxes and create a payment schedule for your business.

Options for Outsourcing Small Business Payroll

Some business owners choose not to handle payroll themselves and instead outsource it to a third-party vendor. There are many reasons why outsourcing your payroll makes good sense. It saves time and enables you to use your time and talents elsewhere to grow your business. If your payroll is complex, with multiple employees, states, and employment statuses, outsourcing it may save you considerable time and prevent mistakes.

Managed payroll services offer a wide range of services. You can outsource the entire process to a third-party vendor or maintain the majority in-house, outsourcing only specific parts of the process.

If you are looking for a payroll processing service:

  • Consider how much of the process you are willing to outsource. List the specific services you are willing to outsource. This will help you narrow your list of vendors to interview.
  • Create a list of vendors to interviews.
  • Develop a simple list of questions to ask so that you are gathering consistent information from all vendors on your list.
  • Compare service prices. Don’t forget to ask about fees. Some companies charge a monthly or per-employee fee plus transaction fees or other hidden fees that can quickly add up. Know what you are committing to so that you can budget appropriately.
  • Explore whether your existing payroll and accounting software integrates with a third-party vendor’s software. Some ERP (enterprise resource planning) programs also integrate easily with third-party HR software for payroll purposes. Ask and work with your vendor to determine which, if any, systems will integrate for easier data-sharing.
  • Contact references. Ask specific questions about service, turnaround times, any mistakes made, and how the vendor fixed their mistakes.

Typical vendors for outsourcing payroll include co-employment situations like a PEO (professional employment organization), which handles all HR functions, to a bank or payroll service company that offers standard functions like direct deposit or issuing checks and calculating taxes. ADP, Paychex, and similar vendors can all issue payroll and provide good service. The complexity of your payroll, your budget, and your comfort with doing it yourself will all determine how much or how little you choose to outsource to a third-party vendor.

Payroll is a critical function within a small business. It must be handled responsibly to keep good employees happy and to comply with legal and ethical guidelines. Outsourcing it entirely or partially, or doing it yourself, are all viable options to explore for the average small business.

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How to Handle Employee Payroll as a Small Business Owner


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