Accounting · January 05, 2023

Tackling the Challenges of Managing Payroll for Your Business

Managing payroll is one of the most complex administrative tasks of running an organization. If you started your business to pursue a passion that doesn't involve this level of accounting, it may fall outside your comfort level.

Business owners often run into some common pitfalls when it comes to their payroll needs. But with some precautions, you can avoid these potentially costly errors.


Basics of payroll management

One of the first things you need to set up payroll is an Employer Identification Number, or EIN. You'll need this if you have employees or operate as a corporation or partnership. You'll also need to register with both the IRS and your state to pay business taxes.

Next, you'll need to decide on a pay schedule and wage status for your employees. The pay schedule determines how often you pay them—whether it's weekly, bi-weekly or monthly. Wage status involves whether you'll pay these employees hourly or as salaried workers.

The next step is to set up your payroll system. Some business owners have the time and expertise to handle their own payroll, which includes calculating wages, deductions and payroll taxes for each employee, then processing payroll and distributing paychecks to employees. A more streamlined way to handle payroll is to hire an accountant or payroll manager or to use payroll software, although these come with associated costs.

Every business is different, so you can decide which approach works best for yours.

Common mistakes to avoid

As a business owner, you should be aware of some common payroll pitfalls and take steps to avoid them.

Doing everything manually

Manually calculating taxes and doing your payroll by hand could lead to costly errors, as well as financial and compliance risks. Instead of doing payroll manually, consider using online accounting software, which will automate and guide you through the process.

Not hiring an expert

Unless you have an accounting or math background, you may not understand the intricacies of payroll as much as a payroll manager, bookkeeper or accountant. Hiring a professional can save you time, money and potential headaches so you can focus on core tasks that drive results for your business.

Accidentally violating the law

Federal and state laws can change every year. If you're doing payroll manually or aren't using an accountant who understands these laws, you might make a mistake. This could result in not paying all employee income, as well as federal, state and local taxes required of your business.

Not keeping good records

Along with abiding by federal and state regulations, your business must maintain accurate employee and payroll records. This is especially important in case of an IRS or state audit, as well as potential litigation. On the plus side, it'll also help you better understand the financial aspects of your business.

Keeping this information in paper files or even spreadsheets may not be the best approach. You may want to consider cloud-based accounting software, which should have enough virtual storage space for you to easily keep track of a high volume of records. Even if you hire an accountant or bookkeeper, they'll likely use the same type of software. You can keep paper copies as backups, but it's best to have duplicates of these records stored on another system for added security.

Best practices

To better manage your payroll, consider the following strategies.

  • Set a payroll budget. You know how much revenue you have coming in, your business's overall cost and your potential profit margin. Factor in these figures—along with the number of employees you have and their pay scale—to determine your payroll budget.
  • Double-check everything. Whether you're doing payroll yourself or outsourcing it, double-check everything before approving any disbursement. If you're working with a payroll provider, they'll likely send you a confirmation several days before they run your payroll. Review it thoroughly to make sure everything is correct. Otherwise, you may risk cash-flow problems if your business account is overdrawn.
  • Keep up-to-date records. Maintain accurate digital and paper versions of your payroll ledger. This can help you with filing your business taxes or when you need to correct an accounting error that affects your payroll or tax obligations.
  • Don't pay late. There's nothing worse than not being able to pay your employees when they expect a paycheck. Good payroll management can help ensure you have the cash on hand when employees expect it. Missing payroll can undermine their trust—and negatively affect your business's reputation.

Keep these factors in mind to better manage your business finances and streamline your payroll processes. Managing payroll is an integral part of running a successful business, so take the time to get it right.

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