From the biggest corporation to the smallest mom and pop, it takes a lot of moving parts to run a business of any size. And while the operational differences between large and small businesses are significant, one thing remains the same: payroll.
Payroll processing is something you’ll have to do on a regular basis. And it’s important to get right every single pay period. Why? Because 49% of workers say they’ll look for a new job after two payroll errors (HR Dive).
If you’re wondering how to set up payroll for your business, there are several options from which to choose. But which is best for you? Keep reading to discover the pros, cons and cost structures for three of the most common types of payroll processing for small business owners.
Option 1: Keep Small Business Payroll In-House
Processing payroll yourself not only requires a close eye on fluctuating tax rates, but you’ll need to process completed employee paperwork (such as a form W-4) for every new hire, and keep employee records available as well. Let’s not forget to mention direct deposit arrangements. However, manual data entry is time-consuming and prone to errors, which can incur harsh penalties from the IRS.
If you’re just looking for a cheat-sheet to get you started, here is the payroll process explained in 10 steps.
- Obtain Proper Paperwork: Start with an Employer Identification Number (EIN) from the IRS. From there, you’ll need to determine employee classifications and collect legal forms (I-9 and W-4) from employees before they begin work.
- Determine employee pay information: Set up pay rates, benefits, payroll deductions, and calculate taxes and withholdings.
- Research state and local income tax requirements: Research your state, local and federal income tax rates to know how much to withhold (FUTA, SUTA, state disability, and workers’ compensation, Social Security and Medicare).
- Choose a payroll schedule: Decide how often employees will be paid, such as biweekly, semi-monthly, or monthly.
- Calculate employee hours: Keep track of the number of hours each employee works and import timesheets if using time and attendance software.
- Review the payrun: When it’s time to pay employees, double-check the numbers, including employees’ net pay and the company’s total cash requirements.
- Pay taxes: Withhold and remit payroll taxes and federal income tax based on various factors. Schedule and deposit taxes on time to avoid penalties.
- Deliver pay: Distribute paychecks or initiate direct deposits, taking into account banking processing times and provide physical pay stubs where required.
- Run Reports and maintain records: Keep detailed employee records of hours worked, overtime, and wages to comply with regulations and track payroll information.
- Complete Year-End Requirements: Be sure to provide necessary forms to employees (W-2 and 1099-MISC) at year end.
For the complete list of payroll processing steps and explanations, check out our article: How to Manage Payroll
So when weighing the options, the key question here is: how much is your time worth? As the lone facilitator who pays employees, you’re responsible for payroll taxes including federal taxes (Social Security and Medicare tax), state and local taxes withheld from employee paychecks. The income tax rates can change on a yearly basis, and without access to a client support system, it’s up to you to spend time in research to stay current and avoid any penalties. Should you need help managing tax compliance for your business, we’ve got a resource for that: How to Avoid Payroll Tax Penalties
The out-of-pocket expense for processing payroll in-house is minimal compared to how much your time is worth. Coupled with the likelihood of making a payroll mistake and steep fines, this might not be the true economical option you seek.
Small business owners spend 5 hours per pay run on payroll which equates to 21 days each year.
– QuickBooks Payroll Study
Option 2: Hire a CPA
If you don’t feel like going it alone, you might consider hiring someone to process payroll. Whether that means hiring an in-house HR administrator or outsourcing the task to an accountant, either way it’s not going to be cheap.
An accountant can help you keep an eye on the bank account and complete necessary payroll paperwork like submitting a Form 941, which is required every quarter by the IRS. Outsourcing payroll will also free up time you can dedicate to directly improving your company. You will get experienced guidance that should be able to avoid any payroll penalties for your business.
Not only is it expensive to use an outsourced CPA for payroll, you may feel like you’re losing control and oversight of the business spending and activities when you stop doing it yourself. And, if in the future you ever decide to bring accounting back in-house, you’ll have to refine your skills and start from scratch with a new payroll system.
Option 3: Partner with an HR & Payroll Company
As a small business owner, you have a lot on your plate. The last thing you need to worry about is processing payroll and possible tax penalties. Partnering with an established HR and payroll company that can handle everything might make the most sense for your business.
While you may think outsourcing to a payroll provider is cost prohibitive, once you analyze the benefits you may think differently. A payroll partner will handle all the deposits and tax filings and should cover any compliance or tax penalties if they occur (which, they shouldn’t). They’ll also maintain accurate employee records that are available in case of an audit. A payroll company keeps up-to-date on federal and local regulations, automatically searching for any available tax credits or opportunities. They’ll ensure your business is compliant at all times.
If you do choose a payroll partner, make sure the company offers additional HR services like recruiting, onboarding and benefits. As your company grows, or maybe even right now, an HR partner who provides more than just payroll can save you countless hours of administrative work, so you can focus on what matters most—your people.
What are some common payroll errors to avoid?
Whether you’re looking to outsource, work with a CPA or manage payroll in house, here are four common payroll mistakes you’ll want to keep an eye out for:
- Misclassifying Freelancers and Employees
- Disregarding Pay Equity
- Workers’ Compensation Insurance
- Federal & State Payroll Taxes
Learn more about common payroll mistakes
4 Common Payroll Mistakes and How to Fix Them
What are the Benefits of Outsourcing Payroll?
When considering all of the options, it’s clear that the DIY approach costs your time, and maybe some frustration. Investing in some payroll software may help, but it too has its limits.
Hiring a CPA to handle payroll is expensive, but it does come with some reassurances. Anyone can plug numbers into payroll software, but a good CPA will look for any tax breaks that might benefit your business. The cost of a CPA will depend on where you live and what exactly his or her responsibilities entail. Generally, they charge by the hour.
A payroll partner, such as Paycor, can take an overwhelming payroll and tax situation off your to-do list. Most payroll companies offer package deals charged monthly or per paycheck. The fee can vary depending on factors like volume, tax requirements and service bundles. The most basic packages should include paycheck processing, direct deposit and standard tax filing. There may be additional charges depending on complexity of tax duties, multiple state requirements and if you have employees in other countries.
How do I handle payroll for different employee classifications, such as part-time or contract workers?
When it comes to handling payroll for the varying employee classifications, the first thing to note is that different tax forms are required for different workers. Employees will complete a Form W-4 to determine how many deductions for federal income tax they want you to withhold from their paychecks. You are then required to pay in federal and state payroll taxes on wages paid, as well as unemployment tax, for each of your employees. At the end of the year, you fill out and send Form W-2, which shows employees their yearly wages and taxes withheld for their tax returns.
Independent contractors, however, will need to complete a Form W-9, providing you with their social security or tax identification number. This puts tax payment responsibility on the shoulders of independent contractors instead of you, the employer.
Keep in mind, independent contractors should be paid through accounts payables, and employees should be paid through your payroll system.
For more information on classifying and paying employees and contractors, check out these articles
Ready to take the next step?
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