The 9 Payroll Best Practices For Small Businesses
Looking to make your payroll processing more efficient? Here are the top payroll best practices that every small business should implement.
As a small business owner, managing your own payroll may not always seem like a priority. Let’s face it: between juggling submission dates and figuring out what paperwork you need to fill out, payroll can be a chore that falls to the wayside. And it’s easy to see why, when so many businesses manage their payroll without following any payroll best practices.
Even if you’re doing your employees’ payroll as a solo job, best practices will help you keep track of submission requirements and deadlines without affecting how much you get done. Read on to discover nine payroll best practices you can start working on today to make your payroll process a breeze.
Table of Contents
- The 9 Best Payroll Practices
- What Other Payroll Problems Does Your Business Face?
- Best Payroll Practices FAQs
The 9 Best Payroll Practices
If you’re ready to streamline your payroll processing and make your payroll management more efficient, these nine best practices can make processing your payroll fast and easy. To simplify your payroll process:
- Classify employees correctly
- Spend the proper amount on payroll
- Keep track of dates & payroll tax deadlines
- Set up payroll notifications & reminders
- Use direct deposit
- Use online payroll software
- Create an HR handbook
- Have organized payroll records
- Protect your online data
1. Classify Employees Correctly
Your payroll process relies on you properly classifying your employees. If you only staff a few people whom you know and trust, the idea that you might be at risk of misclassifying your salaried employees may just seem silly — but it’s no laughing matter. Your company can quickly run into serious, tax-related issues with the IRS if you misclassify someone as a 1099 contractor, for example, when they’re really working for your company as a W2 employee.
In fact, based on state-level research, somewhere between 10-20% of employers are guilty of misclassifying workers, recording an employee as a 1099 contractor, for example, instead of as a salaried W2 employee. Mistakes like that can ultimately impact your company’s revenue if you get hit with federal-level fines. Before you get your payroll process going, doublecheck that you have each and every one of your employees correctly classified, no matter how many of them you employ.
2. Spend The Proper Amount On Payroll
Small business owners often worry that their cash flow will affect their payroll deadlines, and for good reason. If you don’t know how much of your revenue to put toward your payroll, an unhealthy cashflow could be disastrous. Setting aside the proper amount for payroll ahead of time will keep your system chugging along just fine without any cash flow-related hiccups.
One of the most critical payroll best practices is to make sure your business has a positive cash flow before estimating the amount of your gross revenue to put toward payroll expenses. Once you’ve adopted a few strategies to increase your cash flow, it will make much more sense to then go ahead and carve out a rough (while you’re starting out) percentage of funds you should be spending on payroll.
It’s not the end-all, be-all number, but as a small business owner, you should keep your payroll below 30 percent of your total gross revenue funds. Staying at (or preferably below) this number will still make it realistic for your business to manufacture its products and provide its services without confronting negative cash flow numbers.
The great part about planning on a set amount of funds to put toward payroll is that you can always scale that amount up or down in the future. You and your HR and/or payroll manager can decide to move funds around if you notice that you’re spending too much or too little on payroll after a few months. Your business will enjoy increased profitability once you have methods to keep your cash flow positive and you’re certain how much to spend on payroll.
3. Keep Track Of Dates & Payroll Tax Deadlines
Collecting and completing your employees’ payroll documentation won’t do much good if you miss deadlines for submission. The Department of Labor has strict requirements about when and how small businesses must submit payroll documents. You and your company are at risk of being dinged with brutal fines if you neglect to pay attention to these deadlines.
Keeping track of your submission dates and deadlines is a great way to help you plan out the rest of your payroll best practices. Many of the other important habits you develop will fall into place if you get your deadlines in order first. Some of the most important payroll tax dates and deadlines include:
- Retirement Statements: Businesses are required to keep their employee’s statements of retirement, including enrollment, payment, and deduction forms, for at least six years.
- Pay Stubs: As a business owner, you’re responsible for proving to the government that you pay your employees on-time, every quarter. To that end, you’ll need to hold onto pay stubs for four years, which includes any changes you’ve made to your wages along the way.
- Additional Tax Info: Tax forms like employee W2s and W4s are required to be kept for at least four years.
On top of these federal deadlines, you need to make sure that you consistently set smaller deadlines for when your payroll must be processed monthly. Get all of these dates, whether they’re on a monthly, quarterly, or annual basis, onto your payroll calendar. You can choose to use a cloud-based calendar app, for example, if you want to move your payroll operations completely online.
4. Set Payroll Notifications & Reminders
Keeping track of important payroll dates and deadlines is all well and good, but you’ll probably want to set up a system of notifications and reminders to make sure you don’t miss them as well. Companies have traditionally relied on physical calendars to keep track of tax deadlines and dates, but more and more businesses are now switching to cloud-based payroll solutions that sync up with important government submission dates and send them reminders automatically.
If you aren’t yet using software to help with deadline notifications, there are also plenty of calendar apps you can use to manually track dates. These calendar apps can sometimes be more beneficial for extremely small companies that only staff a few employees. Coordinate with your other employees and departments to settle on a notification and reminder solution that makes the most sense for your employees and the size and scope of your business.
5. Use Direct Deposit
Direct deposit, thankfully, has found its way into the vast majority of businesses’ payroll systems. Small business owners who use direct deposit to help manage their payroll process eliminate tons of manual work that they’d otherwise need to slog through.
Electronic deposits also make your end-of-year payroll reporting much more painless, since you won’t have physical files to sort through that you then need to furnish for reporting purposes. This takes a huge burden off you or your HR/payroll manager and frees up their time to help you continue to build out your business’s internal infrastructure.
6. Use Online Payroll Software
There’s no reason to fuss with traditional ways of organizing payroll when there’s easy-to-use, online payroll software available at the tips of your fingers. Instead of searching through filing cabinets to furnish important employee data every time a deadline rolls around, you can use powerful payroll software to make it easy to search through all your employees’ historical data and organize it the way you want.
What’s even better about powerful payroll software, and something that traditional payroll organization systems can’t offer, is flexibility and customization. No two businesses are alike, so it doesn’t make sense to settle for anything less than a solution that’s tailored to your needs. From help with taxes to HR compliance assistance, there are best small business payroll options to choose from.
7. Create An HR Handbook
HR handbooks are a company’s standards, values, and ethical guidelines, put into words. As you may have guessed, these handbooks can be great ways to define your payroll processing procedures as well. Creating an HR handbook is one of the most effective methods of solidifying your payroll best practices and making it easier to follow them.
Try and get together with your HR and/or payroll managers to help you create an HR handbook. Your employees in HR and payroll can give you valuable insight into payroll best practices they already use themselves and can help you define answers for questions they frequently get in their day to day interactions with employees. Remember that your HR/payroll handbook should do a good job of answering frequently asked questions as well as defining your payroll best practices.
8. Have Organized Payroll Records
Keeping tidy, organized payroll records is essential for your own business records and taxes. First, you’ll want to settle on a storage solution to keep your records organized and in one place. There are multiple electronic payroll storage solutions that are easy to use and can be tailored to your business needs.
You also need to keep in mind which records you need to keep, and for how long. The IRS lets businesses know that most payroll records need to be kept handy for at least three years. For other, more sensitive payroll documents, like your employees’ retirement records, wage records, and tax information, there are different requirements for how long you need to keep them.
Organize your payroll system based on how many employees you staff, as well as how many additional documents you keep for your personnel. Choosing a good storage system will also go a long way to keeping your records organized for the long-term.
9. Protect Your Online Data
Strong cloud accounting security measures are the pretty bow that ties up your carefully planned best practices into one package. These days, there’s no such thing as having too many security measures in place to protect your digital assets, especially for assets as sensitive as your employees’ payroll records. Cloud-based security solutions put your employees’ sensitive data first and decentralize how you store your data so that it’s much harder to compromise.
Software solutions that protect your employees’ data on the cloud eliminate nearly all manual work you’d otherwise have to do. For instance, with cloud-based storage solutions, you don’t need to worry that you’re running out-of-date software with bugs that compromise its security. Smart solutions on the cloud will run updates for you, automate your account security and remediation activities, and immediately alert you about fraudulent or suspicious activity that it detects.
What Other Payroll Problems Does Your Business Face?
Payroll processing software and electronic solutions make doing your own payroll easier than ever. But as any business owner knows, there’s always something new to learn about payroll, no matter how long you’ve been doing it either on your own or with the help of colleagues.
As a business owner, are there parts of payroll that you still struggle with? What steps have you taken to try and resolve them? Leave us a comment below about your greatest challenges processing your own payroll, and take a look at our other payroll resources: