It may be among the least sexy aspects of running a small business, but that doesn’t mean that payroll shouldn’t be a priority. An effective and efficient payroll operation facilitates timely and accurate employee pay while withholding taxes correctly in accordance with state and federal regulations. Having a system that fails to perform these basic functions will not only incur the justifiable wrath of employees, but could also result in penalties, audits and other draconian measures that could threaten to end your business.
No doubt, if you’re an experienced small business owner, you already know this and have some kind of payroll system in place. But as the famous writer Oscar Wilde once said, “It is always with the best intentions that the worst work is done.” Suppose your payroll system has experienced some software glitches lately or perhaps was not in compliance with federal and state tax regulations. How do you rectify these errors, ensuring they will never happen again? What best practices should you, as the small business owner, undertake to improve your payroll operations?
Minimize your pay cycles
Having different pay schedules for different types of employees, such as monthly for management or bi-weekly for hourly employees, may be a commonplace practice, but it can lead to duplicating errors in the payroll process.
”The less of these schedules, the better,” says Tiffany Washington, owner/founder of the five-year-old Waldorf, Maryland-based Washington Accounting Services, which specializes in small business payroll and has close to 1,000 clients.
“Minimizing pay cycles can help prevent the duplication of multiple processes so that the payroll department can operate more efficiently,” she continues. “To maximize efficiency, every type of employee should be paid on the same pay schedule (weekly, bi-weekly, or monthly). This will allow the payroll department to focus on one task at a given time. Having one pay schedule to maintain instead of three is a lot easier to maintain. It will also lessen the chance for errors to be made during the payroll process.”
You may have an online payroll system you consider state-of-the-art, but it will ultimately prove to be counterproductive and costly if it doesn’t mesh with your accounting system. Washington cites a client, with 33 employees, and more than a dozen out-of-state workers, that recently encountered this problem. These distant employees, coupled with the incompatibility of the client’s online payroll and accounting systems (which the client was initially not aware of), was wreaking havoc on the payroll operations, particularly when it came to following out-of-state regulations and administration fees.
Although the withholding of taxes was being done correctly, explains Washington, “the unemployment [taxes weren’t] being coded to the correct state where the employee lived. Instead it was being coded to where this employer was located, which was in Maryland. So everyone was getting unemployment in Maryland instead of it being coordinated to the specific state that they were living in.”
Washington and her staff rectified the situation by filing “two years of amended unemployment returns,” she explains. But not even that cleared things up completely. “There were some penalties that had to be paid because things were not filed in a timely fashion, but we were able to get them up and rolling and in compliance,” she notes.
Outsource your payroll
If you’re a small business owner who doesn’t have the time or energy to invest in building a new payroll system or updating an older one, you may want to consider outsourcing it to a third-party provider. However, before you sign up with any payroll service, do your due diligence and make sure you get referrals from other reputable small businesses or people whom you trust. And remember, the cheapest is not always the best.
"You 'get what you pay for' from service providers, and often times, going with a provider based solely on price means you sacrifice important things like customer service or flexible platforms,” says Jason Maxwell, president of MassPay,, a payroll provider for small businesses. “Some companies will simply look online for a payroll service, or use a website to seek out competitive bids. A business owner might find the cheapest deal this way but could easily end up using an out-of-state provider that is not familiar with specific state regulations. Going with the cheapest option may also mean you sacrifice accuracy in processing.”
Washington strongly echoes Maxwell’s sentiments and adds that very small businesses may want to find a payroll or accounting firm that can also offer bookkeeping, accounting, and payroll together. “It can definitely be cost effective,” she says. With outsourcing, small business owners “are no longer accountable for payroll mistakes.” This also applies for not being responsible for legal compliance as well.
Understand state and federal tax guidelines
If you don’t calculate your payroll taxes correctly, you will incur a penalty. The only question will be when and how much.
Tom Reahard, CEO of Symmetry Software, a Scottsdale, Arizona-based company that specializes in providing payroll and payroll-related software applications to both small and large businesses, suggests that at the end of each pay cycle, small business owners should “look at their payroll register to make sure the taxes being withheld are correct.” Also, run reports that will show your federal and state liability as well as when those taxes are due.
By following the above tips and paying attention to details, you can improve your payroll operations in no time. Not only will you be thankful for turning this integral aspect of your small business into a well-oiled and reliable machine, but so will your employees.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.