Tackling the Challenges of Managing Payroll for Your Business
Managing payroll is one of the most complex administrative tasks of running a business. If you started a company to pursue your passion, the ins and outs of accounting might be outside your wheelhouse or an area you don't enjoy managing. Business owners often run into some common pitfalls when it comes to their payroll needs. But with some precautions, you can avoid 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.
Then you'll need to decide on a pay schedule and wage status for your employees. The pay schedule determines how often you pay employees, whether it's weekly, bi-weekly or monthly. Wage status involves whether you'll pay them hourly or as salaried workers.
After you make these decisions, set up your payroll system. Some business owners have the time and expertise to handle their own payroll. This entails annually calculating wages, deductions and payroll taxes for each employee, processing payroll and then 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 it 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 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. Then, 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 the employee income, federal, state and local taxes required of your business.
Along with abiding by federal and state regulations, your business has to 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 will 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. Many business owners now use cloud-based accounting software, with 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 will likely use the same kind of software. You can keep paper copies as backups, but for added security, it's best to have duplicates of these records stored on another system as well.
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 all 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 you approve the disbursement. If you're working with a payroll provider, they'll likely send you a confirmation several days before they run your payroll. Thoroughly review it 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 later 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 your employees expect it. Missing payroll can undermine your employees' trust and negatively affect your business's reputation.
Keep all these things in mind to better manage your business finances and to streamline your payroll processes. Managing payroll is an integral part of running a successful business, so take the time to get it right.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.