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Employees can be incredibly easygoing and hardworking, but, deep down, when they come into work, they’re often thinking, “Show me the money.” Small businesses must create a process to pay employees and track all necessary information.
Making incorrect payments and reporting the wrong information is the fastest way to anger both trusted employees and the IRS.
Payroll processing is simply understanding how payroll works and how to integrate payroll/accounting software with your payroll procedures. Read on to learn how.
The easiest way to start processing payroll is to break down the procedures into steps and follow those steps each payroll period.
I would recommend creating a proprietary checklist that integrates each of the websites and programs that apply to your specific small business payroll and then following that list each week.
Your first step is to get all necessary paperwork signed by the new employee. This list covers most of those documents:
Once you set up your new employee process, enter all necessary information into your accounting software or some other database to be used on payday. Scan and save all the completed documentation in a separate folder for each employee for easy access whenever it is needed.
Most small businesses pay their employees either bi-weekly (every two weeks) or semi-monthly (twice per month). Typically, employees are paid bi-weekly if they are mostly hourly workers, because it is easy to calculate the two weeks’ worth of pay.
If employees are mostly salaried, semi-monthly might make more sense because it eliminates two pay periods over the course of the year.
If your business is in the construction industry, you may need to pay wages based on the Davis-Bacon Act. Those wages must be paid weekly.
If your bookkeeper or office manager has the bandwidth to process payroll weekly and you may need to pay it weekly in the future, it is a good idea to start paying weekly now to avoid any surprises.
Some businesses choose to pay monthly or, if they employ many contractors, per project. The key is to set a schedule and stick to it -- one of the number one stressors for an employee is not knowing when they will be paid.
Almost gone are the days when employees would line up in front of a punch card machine and stamp their individual time card upon arrival. Most accounting/payroll software programs now have an app for employees to punch in and out that tracks the employee’s location to ensure they are where they should be.
The best of these apps will integrate seamlessly with payroll software to automatically calculate the gross pay for the payroll period.
Despite technological advances, some businesses will still have their employees track time manually and fill out their own time sheet at the end of the week.
There are no inherent problems with this method -- but it must be paired with strong controls. Each timecard should be signed by the employee and then approved and signed by a supervisor, ideally one who actually witnessed the work being performed.
The information would then be manually entered into the software or each employee’s pay rate would be applied to their time to calculate gross pay.
For salaried employees, each pay period should be the same amount and incentive pay should be calculated based on the agreed-upon terms in the contract.
The next step is to get from gross to net pay. The following payroll deductions may apply to an employee’s paycheck:
This step can be done manually. You could research and discover all the relevant rates for government charges and subtract out all the other deductions. It is almost certainly not worth it.
Payroll software, or a free payroll calculator at the very least, will reduce the risk of overpaying an employee and struggling to get the money back or underpaying and creating badwill -- especially if the error is not discovered until the employee does their taxes in the following year.
Finally, if Davis-Bacon wages are paid, keep in mind that many employee benefits, such as the employer portion of insurance premiums and employer 401k match, can be subtracted out of the cash fringe portion of payroll. Do not make the mistake of double paying employees.
This is the moment of truth. Employees have been integrated into the business, time has been tracked and used to calculate gross pay and deductions have been subtracted out. It is time to make the actual payment.
The easiest way to do this is to require direct deposit for employees and open a second business checking account specifically for payroll. Each week, print out a report with the paycheck totals and taxes to be paid and transfer that amount from the operating account to the payroll account.
Then, the paycheck ACH (ACH stands for automated clearing house and it is how the bank sends money out to be direct deposited) information can be exported and uploaded to the bank and the government charges can be withdrawn.
Each bank will have its own ACH process, so you may need to work with your relationship manager or an IT professional to get the file process set up correctly.
During this part of the process, set up as many checks and balances as you can. Each time you export or upload information, check with the software to make sure the numbers are correct. If something goes wrong and an employee brings it to your attention, correct it as soon as possible.
If you must print physical checks, it still makes sense to have a separate payroll checking account. Also, make sure you set up a different check type within your accounting software to ensure you are printing all necessary paystub information (such as hours, taxes withheld, etc.) on the physical check.
After the money has been transferred, it’s data time. Endless third parties need payroll information. Here are the related tasks you will need to do each pay period and complete payroll for the period:
There are also items that will need to be submitted (and likely paid) each quarter or year:
Good payroll software and payroll companies will be able to do all this reporting. They keep track of changes in forms and file types for you and export the information in the correct format.
Save a version of everything that is reported to third parties. Small businesses that could easily access their IRS form 941s and knew how to print reports from their payroll/accounting software had a huge leg up on getting PPP loans.
PPP (Paycheck Protection Program) loan applications required historical payroll information. Avoid being the business owner who is pulling their hair out digging through ancient emails trying to find information.
The payroll process is intense and involves a lot of busy work. It is fraught with the potential for data entry error that can lead to mispayments that engender badwill with employees.
Choosing a payroll company or online payroll service would go a long way toward limiting these errors. If this is too costly, at the very minimum, business owners should rely on a smart and trusted employee to complete the process.
Our Small Business Expert
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