Managing payroll is a complicated task that many small business owners have to handle on their own. Between navigating compliance and accuracy issues while balancing daily responsibilities, they often don’t have time to keep up with all the moving parts.
Every business's payroll is unique according to its employee classifications, pay structures, and relevant state and federal laws. However, employers can learn how payroll works by first understanding the factors that affect it and then understanding the different methods of payroll processing. With this knowledge, business owners can become equipped to do payroll for their business and select the best payroll system for their operation.
Payroll is the compensation that a business needs to pay its employees for a set period of time or on a certain date. Usually, a company's accounting or human resources department manages it, though the owner or associate may manage payroll in smaller businesses.
The most common components of payroll are:
Depending on the industry, there may be more types of wages.
It's difficult to classify payroll management as strictly either a finance or an HR function because it could be both. That's why business owners sometimes face a challenge in picking the right person to manage it.
Many businesses hire someone from a financial team because they generally need the person handling payroll to be well-versed in payroll figures. Someone with a finance background can understand these figures and use forecasting to make determinations.
Payroll could also be an HR function because it entails compliance and ensuring correct employee classifications, such as exempt or nonexempt, which a traditional accounting team member may not be familiar with.
At the end of the day, payroll management is likely a bit more of an HR function, but doing the best job requires a healthy balance of experience from both sides.
Employers determine payroll broadly according to each employee's pay structure and payment management system.
The pay structure includes the availability of overtime pay, payment schedule, method of tracking hours, and any incentives or benefits. It also considers factors that affect the employee's net pay, like state tax laws and benefits that might offer deductions.
But keeping payroll in compliance is much more complicated than these two broad components. Factors that also contribute to payroll management include:
Many classification errors can occur during the payroll management process. Small business owners need to understand relevant legislation for the following aspects of payroll:
With the technology available today, there are many ways small businesses can run their payroll. This gives employers the ability to pick the best option according to their specific situation.
Businesses could choose to let an internal department handle payroll processing. The staff who process payroll in-house are categorized as employees. As a result, employers pay them through the same payroll management system that they help manage.
This option is not ideal, however, as it's often more time-consuming for internal team members and owners. It also requires in-house expertise, which is a rare, and often expensive, skill set. The risk of compliance challenges can dissuade in-house payroll options if a business can’t hire someone with the necessary expertise.
Small businesses with between one and 50 employees often use payroll software like QuickBooks to manage payroll in-house.
These programs are a cost-effective way to simplify the process of job costing, making estimates, paying vendors, and paying employees. The software can help ensure that employers correctly deliver employees' pay rates and accurately account for meal break penalties and overtime.
This method still leaves employers with complicated responsibilities, including filings with different states and filing annual W-2s.
Payroll management software may offer small businesses an affordable in-house option until the company grows beyond its capabilities and becomes more complex. As businesses grow, they should consider hiring third-party professionals to manage and scale their payroll.
Outsourcing payroll to a professional is a cost-effective and time-saving option that takes the burden off a business owner’s shoulders and places payroll into experienced hands they can trust.
Payroll service professionals can handle all payroll responsibilities, from collecting employee information and setting up direct deposits, to handling pay stubs and filing tax payments. Employers may also favor hiring a professional because they can expect to pay a fixed rate for the service, eliminating the need to hire a full-time employee.
Allowing a professional to take care of a business’s payroll can provide huge benefits to a company. It can also help support a more streamlined system of business operations.
Payroll systems manage everything related to the process of paying employees and filing employment taxes. Companies can implement them to track executable actions like:
Small businesses, in particular, can greatly benefit from the features of payroll systems. For instance, employers can access tools to help them with:
More sophisticated platforms, like myBBSI, offer an integrated system to help with additional functions, such as electronic employee onboarding and minimum wage and state tax compliance rules.
Each payroll system has certain selling points, and it can be confusing to determine the best payroll system for your business. To help sift through all the options, here are some key factors to consider.
Small and mid-size businesses can have a challenging time navigating payroll. The process of setting up and running payroll includes many critical steps to ensuring compliance and accuracy. Let’s look at four steps that will help you run your payroll smoothly.
Since the necessary forms for compliance vary across states, employers need to make sure all employee information and payroll forms are accurate. This helps avoid complications from transferring incorrect information into their system, such as using an employee's preferred name instead of their legal name.
Employers need to collect critical employee application information, including:
It's also important to establish the guidelines for employees' paid time off (PTO) plans, such as the number of sick days and vacation days employees receive. This helps employers ensure they're tracking and accruing hours correctly according to plan details. Employers should also verify the employee handbook accurately reflects the guidelines, so there isn't any confusion.
At this stage, employers must consider how the payroll schedule impacts their cash flow. For example, if a restaurant is busiest over the weekend, they probably shouldn’t pay their employees weekly on Fridays when they’re less likely to have the cash flow to cover payroll. Other factors employers should consider before establishing a payroll schedule include:
After accounting for these factors, employers can decide on a schedule that makes the most sense. The most common payment schedules are:
Employers take withholdings, such as garnishments and taxes, out of employees' paychecks to pay their income taxes per pay period or any debts they’re contributing towards. Typically, the payroll system will calculate this data on its own, though small business owners running their own payroll often must do it themselves.
For instance, they may encounter difficulties when handling garnishments less than or more than the state minimum wage. If employees have multiple garnishments, various state and federal guidelines prioritize them differently.
Another common mistake employers may make is paying an employee as a subcontractor if the IRS has informed the employer that the worker has a large garnishment. This practice should be avoided, as it places severe financial risks on both the employee and the employer.
Finally, employers must issue the employees' net pay via a live check or direct deposit. After this, businesses must complete their state and federal tax payments. Employers should review quarterly and annual reconciliations with the state, Fed, and IRS to ensure they file the right form. For instance:
Employers can reconcile these forms with payroll to verify the accuracy of the filings.
Most software, including QuickBooks, have an employee export file that includes all employee data, such as:
Employers can import these files into their new provider's program, using metadata to place the information in its appropriate location.
Generally, there are no legal requirements for moving payroll. However, employers should be careful about letting different software providers know they're moving systems, because providers may choose to block access to the data.
In this case, or if the old provider cannot provide the data for whatever reason, employers can enter the information manually by using a PDF check report or employee applications. This method is time-consuming and should be a last resort option.
BBSI provides dedicated Payroll Consultants who familiarize themselves with a business’ processes to help spot trends, call out potential issues, and ensure payroll complies with state and federal legislation.
When a company partners with BBSI, they also get access to BBSI’s proprietary payroll portal, myBBSI, which has been designed with clients in mind. Business owners can utilize myBBSI to manage their payroll and onboard new employees from their phones or desktop. With quarterly and monthly system updates that add new features, its functionality continues to expand.
Finally, BBSI's pay-as-you-go workers’ compensation model and annualized billing eliminate payroll audits and offer businesses predictable monthly billing. This ensures that clients maintain their cash flow and don't receive an exorbitant bill at the end of the year due to misclassified employees or incorrectly reported wages. This gives employers a clearer idea of their monthly spend, helping them make projections and bid for projects more effectively.