You launched your small business and things are going well. You've started to scale - but growth comes with different kinds of challenges. Hiring employees and contractors means you now need to manage payroll, too.
Are you ready to deal with the bureaucracy of overseeing payroll as your small business expands?
Answering this question requires a good look at your operations and resources. You want to determine when you can handle payroll on your own and when it becomes a better option to turn the task over to a third-party professional.
The key is knowing how to manage payroll as a small business, as well as understand your options as you expand. These tips will let you overcome your growing pains and create a seamless payroll management structure.
The key is knowing how to manage payroll as a small business, as well as understand your options as you expand.
The importance of getting payroll right
Payroll represents a crucial function of any business. Your employees and contractors depend on you for their livelihoods. At the same time, you depend on them to keep your vital operations humming.
Any hiccup in payroll can have long-lasting implications. One study showed that almost half of workers (49%) would start looking for a new job after two payroll errors. Even accidental missteps can greatly reduce trust and loyalty within your small business.
Meanwhile, payroll is often an opaque process. Even vigilant employees can miss errors. That is, until they face consequences at tax time and look for someone to blame.
There are statistics to prove this point as well. A separate survey found that just six out of 10 employees considered themselves "very certain" that their deductions and pay were calculated properly. That means 40% of workers have doubts about their take-home compensation.
You don't want to contribute to these worries. As best you can, you want an accurate, reliable payroll operation. That way, your employees and contractors can think about expanding your business and not worry about their paychecks.
What do you need to set up your payroll?
Payroll is a bureaucratic operation. It's about record-keeping and paperwork. You'll want to gather the right information and complete the appropriate documentation.
The first step is understanding what items you need to complete in order to ramp up your payroll operation. Here are a few things to keep in mind:
Employer Identification Number (EIN)
This is the ID number that governments will use to track withholdings and other payroll-related items. Think of it as a social security number for your business. Once you move beyond a sole proprietorship, you'll need to obtain an EIN to conduct your payroll.
Each employee you add needs to fill out a W-4. This will tell you all their pertinent information, as well as let you know the deductions you'll have to make on their behalf. It's essential for calculating payroll, as well as a crucial form in itself.
You'll need to track your employees in order to create an accurate payroll. You'll need to know how much they make and the hours that they work. In addition, you'll need a system to organize all the paperwork you gather about your workers.
How will you pay your employees? Every other week? Twice a month on regular dates?
As long as you are consistent and precise in your calculations, the right answer will depend on your situation. But these seemingly small decisions can have unexpected consequences.
For instance, the decision to pay every other week instead of twice a month will lead to some months having three payrolls. These can be difficult for small businesses, especially if your clients are paying on a monthly basis.
How do you run payroll yourself?
In many situations, it makes sense to oversee your own payroll operations. You just need to conduct sufficient research to understand the process. At the same time, you need to have the time and energy necessary to perform the task on a routine basis.
If you choose to run payroll yourself, here are a few steps to keep in mind:
Gather the basic information
Start by detailing the information you will need. These will give you the inputs you require to run your payroll calculations. Consider items like:
- Tax rates
- Employee pay rate
- Withholding information
Do calculations manually
Want to go old school? You can calculate payroll by hand. No, we don't mean taking out a paper and pencil, while borrowing an abacus from a museum. But you might not need an elaborate support structure for payroll.
If you have a small staff and a relatively straightforward compensation program, a simple spreadsheet can often do the trick. Still, you need the right background understanding to perform the task accurately. Here are some steps to keep in mind:
- Learn the relevant tax law
- Calculate wages
- Deduct taxes
- File taxes and deposit the appropriate funds
Use payroll software
Do you do your taxes by hand? Probably not. The IRS reports that nine out of 10 taxpayers either use an outside professional or rely on software.
For payroll, similar options exist. Software represents the compromise choice between manually completing the process and turning to an outside professional. As with tax software, it will lead you through the procedure and streamline the task.
Should you consider a payroll service or other professional alternative?
As your small business grows, your payroll will inevitably become more complex. You'll have different kinds of employees and a growing variety of compensation programs.
The result? Your payroll might become too unwieldy for you to handle internally.
Still, knowing when to make that transition can be tricky. Here are a few signs that you can continue to complete payroll on your own:
You have a stable workforce
Once you compute the payroll information, the paycheck-to-paycheck amounts shouldn’t change substantially. Effectively, every payroll becomes a cut-and-paste repeat of the last one.
The nitty-gritty math only comes into play if you hire new employees or there is some other change to the payroll information. If you have stable staffing numbers, the routine work should be limited.
You have a relatively simple pay structure
Some types of workers get paid in an extremely predictable way. Salaried employees, for example, fundamentally have the same figures every time payroll comes up.
However, that's not true in every situation. For instance, do you offer commissions or frequent bonuses? Those incentives can complicate payroll calculations.
At the same time, you might have workers jumping from different roles with slightly different pay scales. This can come up in manufacturing situations or when there are varying wages for different shifts. Even keeping track of the variance for hourly workers can become a chore at payroll time.
You have a tax/accounting background
You or someone within your company might have the ideal background for computing payroll. In these situations, you can leverage this expertise to keep your payroll operations in-house.
When does a payroll service make sense?
You might be reluctant to take on the added expense of using an outside service, like Paychex or ADP. At the same time, the idea of handing over crucial information about your company might give you pause.
However, using a payroll service represents a common step in a company's evolution. At a certain point, you might not have the time or the ability to oversee your own payroll on an ongoing basis. Rather than risk mistakes or waste your own time, a third-party professional can unlock new potential for your growing business.
Here are some signs that an outside payroll service might be good for your startup:
- You are adding staff quickly or have high turnover
- Your pay structures are variable or change frequently
- You don't have sufficient expertise within your organization
- Your time or your top employees' time gets eaten up by routine payroll matters
Learning to Manage Payroll for Your Small Business
Any expansion comes with growing pains. And managing payroll is a common pain for most small business owners.
Because of its importance to both you and your employees, you need to have the most stable, accurate process possible. In many cases, you can handle the details yourself. However, as you grow, you might need additional support to ensure accuracy and to free yourself up for more strategic endeavors.
With the right payroll plan in place, you can confidently add staff and open the door for accelerated growth in the future.
With the information provided here, you'll have the insight necessary to make the best decision for your business. With the right payroll plan in place, you can confidently add staff and open the door for accelerated growth in the future.