If your small business has recently hired employees, then you may have a doubt: Am I doing it right?
Sure, you may be calculating your employees’ hours correctly and giving them the checks with the right amount. However, are you sure that you are also calculating payroll correctly?
Calculating wrong payrolls can result in penalties. It is found that 1 in every 3 small businesses are penalized by the IRS for errors related to payroll. And, these fines add up every year. Being a small business owner, you can’t afford such mistakes. Here’s a guide to help SMBs manage their payroll properly.
1. Ensure That Payroll Is Compliant with the IRS
Before you start filing documents, ensure that the payroll documents are within the compliance standards set by the IRS. This would mean that your employees are classified in the right manner, assuring your small business has an EIN (Employer Identification Number).
An organized payroll system is important to make sure that the business is safe from any penalty by the IRS. If you are not aware of the compliance laws, you can check the IRS’s website for more information or even ask your accountant.
2. Know the Deadlines
Being aware of the accounting deadlines and returns in advance makes the payroll process much easier. If you’re not prepared to file your income taxes and payroll isn’t done, it is recommended to meet the W-2 deadline on priority. While for income taxes you can file for an extension, this is not the case for W-2s and may lead to a penalty by the IRS.
Small businesses should have a system in place to alert them of important deadlines or if they need to complete something on priority. Working ahead would help them resolve potential issues or blips.
3. Categorize Your Employees Correctly
Small businesses must categorize their employees as either employee of the firm or independent contractors. For employees, you need to pay taxes, follow the minimum wage law, and take care of overtime wages. But for independent contractors, these things aren’t essential as they pay their own taxes.
It must be noted that determination requirements vary according to the state. So, check with your state’s Department of Labor regarding the rules to be followed while categorizing employees. Incorrect categorization may lead to owing back taxes and wages, penalties by the IRS and interest.
4. Select the Software That Suits Your Business Needs
While selecting a payroll software for your small business, go for the one that’s hosted on the cloud. Cloud would make it easier for you to access all the payroll data anytime you want to and from anywhere in the world.
If you’re finding the software difficult to use, consider taking a short training which would help you to be more efficient and save time.
5. Set A Budget
Setting a budget plays an important role in planning a payroll. Make sure that taxes and wages that must be paid are included in the budget. If you are a business owner, you need to pay Social Security and Medicare taxes along with other employment taxes. So, plan for these expenses in advance to avoid problems later.
6. Review Data Entry and Documents for Accuracy
Mistakes such as incorrect data entry, misspelling, or wrong information can cost small businesses hundreds of dollars every year. It’s essential for small business owners to review all the reports to make sure that there are no mistakes in all the required documents.
Alternatively, you can also hire a member of your staff as a payroll administrator who will audit the entire payroll system and find out issues.
For example, you should follow up with the employees once they fill out W-2 forms to make sure that accurate information is being sent to the IRS. Starting early in the tax season and reviewing all the information beforehand would help you save a lot of money.
7. Keep an Updated Profit and Loss Statement
An updated and accurate profit & loss statement would give you an idea about your business’ profit on a monthly basis. It can help bring to your attention if your business owes any current taxes or expenses which are not necessary and can be reduced.
8. Automate Your Payroll
With manual payroll system, you may end up with a number of mistakes such as recoding numbers in the wrong spot, punching wrong data in the calculator, or forgetting to include a particular field in the payroll process. Moreover, it is comparatively a slower process than an automated payroll system.
With an automated payroll system, you can process the payroll through a computerized system. With the reduced likelihood of errors, the process is much simpler and helps businesses save a tremendous amount of time.
9. Keep Yourself Updated with Latest Changes
Do not assume that laws would not change. Government is constantly passing new laws. Small business owners must dedicate time to keep themselves updated as it would help them save time and money in the long run. Minimum wages and tax rates often change on an annual basis.
Business owners should comply with labor and employment laws. FLSA (Fair Labor Standards Act) is one of the notable examples of federal law. This act sets guidelines related to the age of employees, overtime, and minimum wage.
There are a number of sources to keep yourself updated about changes in policies – check government websites regularly, there are a number of news sources which report on payroll-related changes, employers can also subscribe to niche blogs and newsletters from government sources, or they can consult with an in-house attorney who is well-versed with laws related to payroll.
10. Consider Outsourcing Your Payroll
If you’re finding it difficult to manage your payroll, you may consider outsourcing to a payroll company. As this is their full-time job, it would save a lot of hassle and loads of paperwork. It is also a safe option as most outsourcing companies have tools in place which can identify fraud activities and take timely action.
To Sum It Up!
Handling Payroll is an essential part of any business. The small businesses, in particular, have to make sure they comply with the IRS standards and keep themselves updated with the latest laws. For this, they can make use of cloud-hosted payroll systems to ensure an error-free process.
Efficiently managing the payroll leads to a hassle-free business process, where the businesses know what they owe and how much they can spend.
Looking for more information on payroll management? Call us for expert advice: 855-910-6927