If your small business employs workers, it’s essential that you pay them on time and accurately. A payroll management system can help make this task easier and help you avoid costly mistakes.
Your workers’ comp premium is calculated based on your company’s annual payroll. Payroll includes employees’ total compensation, including bonuses, commissions, vacation and sick pay. Each year, your insurer conducts an audit to calculate your actual payroll for the year. If you overestimated your payroll, you’ll receive a refund or credit. Conversely, you’ll owe money if payroll is underestimated.
Payroll management is a catch-all term for running payroll, paying payroll taxes, and storing the related documents. If you’re in charge of payroll management, you can reduce the time you spend calculating payroll taxes by implementing a payroll management system. To get started, determine which parts of the payroll process you want to outsource and which you’d like to continue managing in-house. Certified payroll specialists, certified public accountants and bookkeepers can help. It’s important to note that even if you delegate some of these tasks to outside vendors, you’re still responsible for reviewing and approving payroll and ensuring the information you provide to the vendor is current and accurate.
If you’re confident you can handle payroll on your own, payroll software can save time, automate some of the tasks and reduce the risk of making errors. In fact, more 55 percent of small businesses manage their payroll online, according to the National Small Business Association’s 2019 Technology & Small Business Survey. However, while payroll software can save small business owners time, you’ll need to know how payroll works to set up the software correctly and identify errors.
Assuming that you’ve already set up your employer ID number (EIN) and have collected the necessary forms (W-4, state income tax withholding, and I-9) from each employee, the experts at Motley Fool say the next steps are to:
- Obtain a state tax ID number for every state in which your employees live
- Choose a payroll schedule, whether it’s weekly, bi-weekly, or semi-monthly
- Implement a time-tracking system to track hourly employees
- Open a separate payroll bank account for payroll reconciliation
- Collect direct deposit bank information from your employees
- Agree on each employee’s hourly wage or salary
Except for time tracking, all of this information goes directly into your payroll software.
Then, according to Nerd Wallet, the next steps are:
- Tracking employee hours. Many payroll products offer integrations with time-tracking apps or include time-tracking features. You also can use paper time sheets or a time clock.
- Calculating gross pay. By implementing time clock software that integrates with your payroll software, you won’t need to enter each employee’s hours manually.
- Subtracting payroll deductions (pre-tax, tax withholdings, and post-tax).
- Calculating net pay.
- Calculating employer payroll taxes, which are based on employee compensation. These taxes include:
- Federal unemployment tax
- State unemployment tax
- One-half of Medicare and Social Security taxes (FICA)
- Local taxes
- Reconciling payroll. This means checking your work and ensuring your expected payroll matches the actual payroll. While it may seem unnecessary to complete this step, since payroll software automates the process, mistakes can happen.
- Reviewing any figures that seem higher or lower than expected. Your payroll software should automatically flag potential inaccuracies but double-check your calculations.
- Preparing payroll journal entries. A payroll journal entry includes all the costs to process payroll, including wages, employee- and employer-paid payroll taxes, and payroll deductions. Payroll software often integrates with accounting software to automatically prepare payroll journal entries.
- Running payroll, which means approving direct deposits and checks. It typically takes a few days for direct deposits to land or for checks to be printed and distributed. Some payroll products offer same-day or next-day direct deposit; others require five business days. To make payroll by payday, allow time for processing.
- Making tax and benefits payments. Luckily, most payroll management systems will calculate, file and pay federal and state payroll taxes on your company’s behalf. In addition, your payroll software usually withdraws enough from your bank account each payroll cycle to make these payments on time. If you manage health insurance or retirement plans through the same service, you might also be able to make those payments electronically, too.
How to maintain payroll records
Once you get into the habit of running payroll, your work isn’t done. Be sure to:
- Update employee records as needed. This can be done via self-service online or paper forms, depending on your system.
- Save your records. The Internal Revenue Service requires businesses to keep employment tax records for at least four years, while the U.S. Department of Labor requires companies to keep payroll tax data for at least three years. Your state may have additional record-keeping requirements.
- Back up electronic records provided by payroll software on a separate device or platform.
If you’re concerned about how miscalculating your expected payroll will affect your workers’ comp premium, some companies—including Pie—offer pay-as-you-go billing. This means you won’t pay an initial deposit for coverage, and you avoid the potential for an additional bill after your annual audit.
Thanks for reading! Please note that this content is intended for educational purposes only. As laws change regularly, you should refer to your state legislation and/or an advisor for specific legal counsel. If you’re a small business owner, learn more about workers’ compensation insurance or check your current rate in 3 minutes.