5 Expert Ways to Manage Payroll for Small Businesses Efficiently
Published January 21, 2023.
Although managing payroll can be a daunting and time-consuming task for small business owners, having the right system in place can make this process less tedious and stressful. Establishing error-free payroll processing is important not only for staying organized but also for making sure taxes are filed properly and employees are paid on time. Here are 5 expert ways that will help make payroll management easier for small business owners.
» Payroll software: see whether your small business needs one
1. Register for an Employer Identification Number
Registering for an Employer Identification Number (EIN) is the first step in managing payroll for small business owners in the US. This unique, nine-digit number is required before you can establish payroll for your employees. In addition to identifying your small business for tax purposes, your EIN is also often required when applying for licenses, filing payroll taxes, or opening a bank account.
Depending on where your business is based, you may need to obtain a state-level EIN on top of your federal one. Nevertheless, the process for obtaining an EIN is straightforward and can be done quickly and easily online. Once you have your EIN, you can move on to the next step in managing payroll for your small business.
» EIN vs. tax ID: learn the fundamental differences
2. Understand and Comply With Wage Laws
Understanding and complying with wage laws is an essential part of managing payroll for small businesses. There are both federal and state laws that businesses must abide by, and it's important to understand the legal obligations associated with payroll. It's essential to double-check your payroll process to ensure employees are getting paid accurately and on schedule. Finally, you want to make sure you're always paying the correct amount and taking care of the following taxes:
- Employment taxes/Federal Insurance Contributions Act (FICA) taxes – Social Security and Medicare
- Local tax – may vary based on the region
- State tax – calculated according to the state you're in
- Income tax per employee – the amount withheld from employee wages for federal and/or state taxes
By understanding and complying with wage laws, you can ensure your payroll process is compliant with federal and state regulations as well as accurate.
» Looking to reduce payroll tax? See 5 legitimate ways to do so
3. Manage and Monitor Your Cash Flow
Managing and monitoring your cash flow is an important part of managing payroll for small businesses. As more problems can arise when there isn't enough money to pay employees, it's important to identify cash flow issues early on. By monitoring your cash flow regularly, you'll be able to identify any problems such as overstaffing or overpaying.
During financially stressful periods, it's advised to delay vendor payments or collect outstanding customer payments before delaying wages or downsizing. This can help ensure your employees are being paid in a timely manner and avoid cash flow problems.
4. Decide on Salary Status and Pay Frequency
The salary status and pay frequency are important decisions for small business owners that will have a direct impact on payroll costs, compliance requirements, and employee satisfaction, contributing to the overall workplace culture. It's important to understand the implications of each decision and make sure they align with the needs of your business.
Salary status refers to how wages are computed for employees. Generally, there are two types of salary statuses—an hourly rate (for non-exempt employees) and a salary (for exempt employees). The right salary status for your small business will depend on the position of the employee and the needs of your business. Choosing the wrong salary status may lead to legal and financial implications, so it's important to understand the differences between the two before making a decision.
Pay frequency or pay schedule refers to when and how often you pay your employees. It's essential to be compliant with federal and state laws to ensure you meet the minimum payday requirements of your area. Generally, there are several different payroll frequencies, including weekly, bi-weekly, and monthly payments. It's important to select the frequency that is best for your business, taking into account employee preferences and the cost of processing payroll payments.
» Want to reduce payroll costs? Here are 5 money-saving strategies to do so
5. Set Up a Payroll System
Setting up a payroll system helps calculate and manage employees' paychecks. It provides small business owners with a cost-effective, convenient, and accurate way to pay their employees on time. Investing in good payroll software can prove to be a very wise decision in the long run, as it will result in streamlined payroll processing. There are three options to manage paychecks:
- Manual: You can do payroll by hand, although this can be time-consuming and prone to errors.
- Outsourced: Outsourcing your payroll and taxes means hiring someone to do these for you.
- Software: Automated payroll is cost-effective, accurate, and time-saving, in addition to storing records required by the Fair Labor Standards Act (FLSA) and the Internal Revenue Service (IRS).
These three options should be carefully evaluated to choose the one that works best for your business.
Efficiently Manage Your Small Business Payroll
Payroll laws are constantly changing, and it's important to stay compliant to avoid potential legal issues. Incorporating payroll software can help you streamline the process and save time and money while staying compliant with all the relevant laws and eliminating stressful paperwork and administrative problems.
» Need help managing your small business payroll? Read TBR's payroll software reviews and find the right solution for your business' needs.