Payroll isn’t just about doling out paychecks. It’s a complex system involving numerous elements, such as calculating employee hours, tax withholdings, and various other deductions. Then, there’s the matter of making sure those funds actually make it into your employee’s bank account.
If payroll sounds overwhelming, read on as we break it down in this guide.
What Is Payroll?
Payroll is a crucial process every small business needs to master. It’s not just handing out paychecks to employees but rather involves a series of steps that ensure everyone gets paid accurately and on time while also fulfilling tax and other legal obligations.
The Many Parts of Payroll
When we say payroll has “moving parts,” we’re not kidding — the entire payroll process is like a well-oiled machine, dependent on several cogs turning in unison.
It begins with gathering employee information and their hours worked during a given pay period. Afterward, computations are done to arrive at an employee’s gross pay. Your business also has the responsibility to calculate various withholdings like income tax, social security, and Medicare.
All of these factors are considered to finally arrive at an employee’s net pay — the amount of money they actually take home. This net pay is usually transferred directly into the employee’s bank account if you’re using a direct deposit system.
You also need to handle tax withholding and reporting tasks, which involve remitting these amounts to the respective federal and state agencies. Considering how time-consuming these steps can be, small business owners often opt for outsourcing these duties to a payroll service or, better yet, automating the process using payroll software.
Getting Ready To Run Payroll
Before even thinking about processing payroll, there are prerequisites you must fulfill. These include registering for an employer identification number (EIN) and opening state accounts for items like state unemployment insurance.
Additionally, you’ll need to decide on a pay frequency — whether it’s biweekly or another interval — and the method by which you pay your employees, which often means setting up a direct deposit system.
Plus, let’s not forget about paperwork. Each time you hire an employee, you’ll need to determine their employment status, whether they are exempt or nonexempt from overtime pay, and gather essential forms like W-4s for tax purposes. In short, your HR and accounting teams have their work cut out for them.
If this sounds like a lot, trust Mosey as your go-to platform for all things compliance-related. We’re here to help you organize your payroll compliance, from helping you open payroll accounts in various states and localities to providing you with steps and resources for your requirements. Plus, Mosey integrates with your payroll provider so you can sync data directly into the app to know when new requirements are applicable to your business.
Why Is Payroll Management Important?
Payroll management plays a pivotal role in any organization. Ignoring its complexities doesn’t make them disappear — it invites legal consequences that no business wants to deal with.
Compliance isn’t merely a box to tick — it’s an ongoing obligation that holds financial implications. In the US, states have their own sets of payroll regulations. In California, for instance, employers face a $100 penalty for delayed regular pay.
Another example is in Florida, where employees can file a civil theft claim against employers for unpaid wages. Timely and accurate payroll helps you dodge these financial bullets, keeping your business on the right side of the law.
Supports Employee Morale
Nothing dampens team morale faster than irregular or incorrect paychecks. When employees question the reliability of their income, trust in your organization wanes, and productivity often follows suit. Doubts about financial stability or time-tracking accuracy can even prompt employees to seek employment elsewhere.
Navigating the world of taxes is no small feat. Payroll management systems help align various financial variables like hours worked, time off, and vacation balances, simplifying the cumbersome process of filing taxes.
These systems are equipped to handle withholdings for federal income tax, FICA, Medicare, and more. All of these details culminate in a simplified, more efficient tax process that aligns with your overall budget.
What Should You Do Before Processing Payroll?
Learning to process your payroll can feel overwhelming, even for seasoned professionals. The challenge intensifies when you’re juggling state and local requirements, which can be very different from locale to locale. Before you hit that “process payroll” button, make sure you have everything you need for success.
Check State Registration Requirements
Let’s break down the key factors you need to think about in this category: withholding, unemployment insurance, paid family and medical leave, and workers’ compensation.
In the Golden State, registering for an employer account with the Employment Development Department (EDD) provides coverage for a few different items:
- Withholding: Personal income tax withheld from employee wages.
- Unemployment Insurance: Funds set aside to offer financial help for laid-off employees.
- Employment Training Tax: A tax that’s for — you guessed it — employee training.
- State Disability Insurance: Held back from employee wages.
When setting up payroll in California, you’ll register once with the EDD to cover all these bases. But to make it even simpler, Mosey can help open the right payroll accounts for your business in every state, so you’re not drowning in paperwork.
The Big Apple also likes to keep you on your toes:
- Withholding: Register with the NY Department of Labor for a Withholding Identification Number.
- Unemployment Insurance: You’ll also get an Unemployment Registration Number with the Department of Labor.
- Paid Family and Medical Leave: Covered under New York State’s Disability Benefits Law.
Florida keeps things simpler but still mandates:
- Unemployment Insurance: This is known as reemployment tax in Florida.
- Workers’ Compensation: This is required if you have four or more employees, either full-time or part-time.
Florida doesn’t include withholding tax for income because it’s one of the few states without personal income tax.
Comply With Local Registration Requirements
Local nuances matter. City or county ordinances can also have specific demands, especially when it comes to workers’ compensation and paid family leave. Keep these requirements on your radar to make sure you stay aligned with them.
Misclassifying your staff can lead to tax errors and lawsuits. Know whether you’re dealing with a full-timer, part-timer, or a freelancer, as each type of employee comes with its own set of tax liabilities and benefits.
Collect Employee Tax Forms
From federal W-4s to state-specific withholding forms, make sure your paperwork is in order. Any discrepancies with tax forms and paperwork can lead to financial and legal repercussions.
To simplify and streamline your HR, payroll, and tax compliance, consider trying Mosey. Our online platform keeps all of your compliance needs in one place — from paperwork to upcoming regulations and tasks, Mosey makes it easy to ensure your business stays on the right side of the law.
What Is the Payroll Process?
Running payroll might seem like a straightforward task at first glance, but it’s important not to underestimate it. There are many steps to follow in order to ensure everything from employee morale to legal compliance is in check.
Set Pay Cycles
Establishing pay cycles is the first task. This sets the frequency with which you pay your employees — be it weekly, bi-weekly, or monthly.
Getting this right is a lifesaver for your accounting department and a must-do for seamless human resources management. It’s particularly important when you’re juggling the needs of hourly employees and salaried employees.
Determine Gross Pay for Each Employee
Here’s where the numbers game kicks in. The gross pay for each employee needs to be calculated before any deductions.
- Employee’s Salary: A fixed sum for those with consistent earnings.
- Pay Rate: Particularly important for hourly employees.
- Reimbursement: Things like travel expenses or any other out-of-pocket costs incurred during work.
Calculate Payroll Taxes and Deductions
At this stage, you’ll account for any deductions that will be made from each paycheck.
These can range from:
- Federal Government: This includes obligations like Social Security tax and Medicare tax.
- State or Local Taxes: These can vary widely depending on your location.
- Retirement Plans: These are contributions to 401(k)s or other retirement funds.
- Health Insurance: This is usually a standard deduction.
- Garnishments: This includes any legal requirements such as child support or other financial commitments.
Double-checking never hurts. Reconciliation ensures that the total amount to be paid out aligns with initial calculations. The accounting department typically spearheads this to prevent any legal issues or employee dissatisfaction.
Once the reconciliation is done, it’s time to hit the “send” button. Whether you’re outsourcing payroll or managing it in-house, the final paychecks need to be both accurate and timely. This is important for maintaining both employee morale and legal compliance.
Pay Taxes to the IRS and State or Local Governments
Adhering to tax obligations is not a “maybe” but a “must.” At the federal level, employment taxes include contributions to Social Security and Medicare, as well as federal unemployment tax. Failure to comply could result in severe penalties, not to mention a few awkward conversations with IRS agents.
First, let’s look at your federal obligations:
- Social Security Tax: Both employers and employees share this burden.
- Medicare Tax: Again, this is a joint responsibility between you and your team.
- Federal Unemployment Tax: Solely the employer’s responsibility, this funds state unemployment agencies.
Next, your tax obligations aren’t complete without considering state or local taxes, which can vary depending on your business location.
Some states, as we mentioned earlier, require additional contributions to unemployment insurance, paid family and medical leave, and workers’ compensation funds. These contributions are usually distinct from state income tax withholding, adding another layer to your tax calculations.
Keep Precise Records
Document, document, document. Whether it’s tax deductions, employee’s gross pay, or any voluntary deductions, maintaining organized records is essential. Not only does this streamline future payroll processes, but it also comes in handy if you face any audits or legal inquiries.
What Are Some Payroll Strategies for Small Business Owners?
Navigating the payroll landscape can be intimidating and sometimes confusing. Don’t worry — a little bit of strategy can make a world of difference. Let’s explore some strategies that can help streamline the process and keep you in the good graces of both your employees and the IRS.
Update Your Payroll Policy Regularly
It’s not just set-and-forget when it comes to your payroll policy. Laws and regulations can change quickly and regularly, so staying current is crucial.
From minimum wage hikes to changes in overtime regulations, it’s essential to adjust your policies accordingly. Consult a payroll accountant if you’re unsure about any changes — consider it a business investment, not a cost.
Automate Payroll With a Payroll System
Paper and spreadsheets are so last century. Modern problems require modern solutions, and that’s precisely where a payroll system comes into play. An automated payroll system can handle everything from calculating an employee’s salary to preparing pay stubs.
You can even find options with pricing that suits small business budgets. This kind of automation lets you focus on growing your business rather than fretting over whether each employee’s paycheck is error-free.
Ensure Compliance Across States
Each state has its own unique set of payroll tax regulations. If you have freelancers or remote workers scattered across different states, compliance becomes a bit of a jigsaw puzzle. The same paycheck won’t necessarily cover all your bases from California to New York.
Payroll deductions in one state might be a non-starter in another. Be mindful of the nuances, and consider a payroll system that can adapt to multi-state compliance to avoid any unpleasant surprises come payday.
Payroll Compliance With Mosey
Navigating state-specific payroll requirements doesn’t have to be difficult. With Mosey, this journey is less about bumping into bureaucratic walls and more about smooth sailing. From withholding taxes to unemployment insurance, HR compliance, and more, Mosey is built to streamline complex compliance processes so you can focus on running your business.