Small business owners often need to hire employees to be able to hit their goals successfully, but this creates a whole new responsibility that they may not have had previously — managing payroll. There are several steps involved in paying your employees and contractors on time and in full while remaining compliant with the law. Luckily, using payroll software or a payroll service lightens the workload for small business owners significantly (and doesn’t have to cost a fortune).

Learn why proper payroll management is an essential part of business success, the different payroll systems you can put into place, how to automate payroll, and how to pick the right payroll service in this article from Nav’s experts.

Why Effectively Managing Payroll Is Important

There are a number of reasons why you need effective and accurate payroll processing, not least of all to stay compliant with the Internal Revenue Service (IRS). You’ll need to file payroll taxes correctly and on time or face potential penalties and fines. Also, you’ll need to make sure you’re withholding correctly for taxes and garnishments from your employees’ paychecks. 

Furthermore, maintaining an accurate payroll system is essential for employee retention. If you want your employees to stick around, you’ll need to pay them on time and the right amount. Otherwise, they might question the stability of the company, which can hurt your reputation. Let’s move on to how to pick the right payroll system for your business. 

Choosing the Right Payroll System and Managing Payroll

You’ll need to think through several aspects of your business’s payroll (and the amount of time you have to commit to payroll as a small business owner). You can choose between doing it all on your own or hiring one of the many trusted payroll services.

1. Manage your own payroll

Pricing is always a consideration when you’re picking how much of your administrative work you want to pay to outsource. If you don’t have the budget for a payroll service at the moment, you can manage payroll on your own. You will have to do the calculations for payroll on your own and then send direct deposits or checks to your employees by hand. Additionally, you’ll need to store your payroll records somewhere secure.

While this system can work, you must remain diligent in making sure your employees get the right amount in their paychecks. Managing your own payroll can allow for more frequent mistakes, so you’ll need to keep an eye on the details. It also can take up a lot of your valuable time. It can save you money up-front to manage your payroll on your own, but make sure you calculate how much your time is worth to ensure it’s the best use.

2. Use payroll software

An affordable middle ground is choosing a payroll software that calculates taxes, sends out payroll, and stores payroll records in one place. Many payroll software options also file payroll taxes for you automatically at each payroll run. All you have to do is process your payroll for payday. 

Of course, cost is always a consideration, but it might be more affordable than you imagine: At the time of writing, you can find payroll software that starts at around $30 per month plus $5 per employee. There are also more limited payroll software options available for free online, which are worth considering, especially if you would prefer to manage payroll manually.

3. Sign up for a payroll service

A payroll service is a step up since the provider handles all of your payroll for you. The provider runs payroll, and files taxes so you don’t have to worry about payroll tax forms, and stores all of your payroll data — you don’t even have to worry about processing it each pay period. Typically, you’ll have to contact the payroll service for a quote on costs, but even this service may be more affordable than you think.

Payroll Management Basics

When you’re starting payroll for your business, you’ll want to follow a few steps to make sure everything is accurate and efficient: Set up your payroll system, make sure your recordkeeping is up to snuff, and remain compliant. 

Setting up a payroll system

First, you’ll need to get an employer identification number (EIN), which is free and quick. This number allows you to have employees on payroll.

Then, choose which payroll system — self-management, payroll software, or a payroll service — would work best for your business. Once you make that decision, you’ll know whether you need to do the research on setting up a manual system or work with your payroll provider to complete the setup. Make sure you can maintain the system month over month, and if you find that your current system or provider isn’t working, you can always switch.

Keep accurate records

If you have a human resources team, they will be responsible for onboarding new employees and keeping their payroll information up-to-date and secure. And if you use payroll software, you can store employee records inside the platform. You’ll need to be able to pull up how much you have paid your employees year-to-date and how much you have withheld from your employees’ paychecks as needed, so make sure your system can handle those kinds of reports.

Understand compliance, taxes, and penalties

You’ll need to understand the ins and outs of remaining compliant with the state and federal governments. The Federal Insurance Contributions Act (FICA) mandates the amount of tax withholding you’ll need for each employee. You’ll need to withhold income tax, federal unemployment tax, Medicare tax, and Social Security tax for everyone you hire. Also, you need to pay state tax for payroll. Usually, you’ll make payroll tax payments with each pay period. Additionally, you’ll need to consider offering retirement plans to your employees (and several states require it). 

Remaining compliant means you can avoid fines and penalties, so it’s important to stay on top of it. Luckily, if you use a payroll software or service, it does the compliance work for you, so you don’t have to worry.

How Payroll Automation Works

Here’s a breakdown of how automating your payroll works, depending on which service you use.

1. Add employees and contractors. Along with their Social Security numbers, you’ll need to add details like pay rate and employment status for every employee and non-employee that you pay. 
2. Track time. If you have hourly employees, they often clock in and out using their mobile devices or a computer rather than an actual clock or physical time cards. This digital time clock can save time because many payroll software options have time tracking included in their services.
3. Let the software do the math. Instead of calculating taxes and withholdings by hand, your payroll software or service will make the calculations automatically. The math is based on your employees’ location, and is updated instantly when there are federal or state law changes. You don’t have to worry about keeping track of every percent, and it reduces error.
4. Pay employees. If you use payroll software, you’ll need to process payroll each pay period — but this shouldn’t take up too much of your time. Direct deposits are then sent out to your employees’ bank accounts based on the information like pay rate and hours worked that was entered into the system.
5. File taxes. Payroll software will usually file your state and federal payroll taxes automatically, usually each time you process payroll. That way, you don’t have to worry about missing deadlines and potentially paying fines.
6. Create reports. Put together payroll reports with the click of a button to gain insights into how much you’re spending on your payroll overall. You can also easily share these reports with your accountant as needed.
7. Get human resources tools. Many payroll software options offer human resources tools for onboarding and more. Otherwise, many payroll providers integrate with other human resources. You can also offer your employees a portal to access pay stubs, see their withholdings, and get tax documents.
8. Get integrations. You can often integrate your payroll with accounting software or other business tools, (like human resources tools as mentioned). Some allow you to integrate with programs like Slack and project management tools, as well.

Payroll Automation Can Make Managing Payroll Easier

Since small business owners can’t be in multiple places at once, hiring employees is often necessary for a business to be able to expand — and running payroll shouldn’t be a burden. Outsourcing small business payroll can lessen your workload, and the perks of using an online payroll system can far outweigh the costs.

Without having to do the heavy lifting of running payroll, you’ll know that employee wages will be consistent, accurate, and arrive in their bank accounts on time. Tax filing also becomes easy — your payroll software can automatically file employment taxes. Then you no longer have to worry about staying compliant with the federal or state governments. 

Tips on Automating Payroll

Choosing the right payroll solution is the best step to ensuring a smooth transition to an automated payroll system. Look at customer reviews of the payroll companies you’re considering to make sure you will be able to reach someone for help if you run into issues. 

Finally, take a comprehensive look at how you process payroll six months or one year in the future to make sure it’s still working for you. If there are issues, try to correct them, and if that doesn’t help, you might need to make larger changes to your payroll system. For example, if you’re not happy with your current payroll provider, you can switch payroll companies. 

How to Minimize Errors and Avoid Penalties

Using payroll software is the best way to Make sure that anyone who will work with the payroll software is trained on using it. Providing the right training up-front will help to lower the chances of data entry errors. Every team member should receive the same training across the board to make sure everyone is on the same page. Additionally, when you hire new employees, make sure they know how to access their payroll information and who to ask with questions.

Additionally, make sure you’re keeping robust payroll records and keep every step documented. If you get audited or miss a tax filing, you’ll need to be able to provide written proof of your business’s payroll history. It’s also your job to keep all employee data secure.

Communicating With Employees When There Are Changes

Anyone who works for you needs to be made aware if you’re switching payroll companies, or if there will be other changes in how to access employees’ paychecks and pay stubs. Communication is key, especially because paychecks are a sensitive matter. Be clear about what your employees need to do to enact the changes (and if it’s nothing, be clear about that, too). 

Don’t spend hours searching for the right payroll provider until you find one that works for you, and that you know you can trust. Instead, use Nav to see all your best options in one place.