Handling the payroll can be confusing and time-consuming, although knowledge of the basics and special software can help simplify the process. As your business grows, at least one of your employees should take on the responsibility of payroll management, or you can look into the cost-effectiveness of outsourcing the job.
What’s involved in running payroll?
It’s a multistep process that involves:
- Calculating wages
- Deducting taxes
- Printing and distributing checks
- Signing checks
- Setting up direct deposit
- Pretax deductions such as health care and 401(k)s
- Distributing W-2s in January
The taxes you are required to deduct from the checks of full- or part-time employees vary by state. Then there are federally mandated taxes for Social Security and Medicare, with the amount dictated by a worker’s salary and number of dependents. Other deductions that you may have to consider are those for health care and savings programs such as a 401(k)s.
Having Cash on Hand
If you don’t have enough cash on hand to meet your payroll, trouble will soon develop. You will constantly need to focus on collecting unpaid accounts to make sure you have sufficient cash reserves to pay your workers. At some point you may face a cash crunch and consider covering the payroll shortage with your own funds. This often happens to entrepreneurs in the early stages of a business, and it is really your personal choice. If you are certain that a big check is in the mail, or you are just a signature away from a new client, then it might be the right thing to do. If you know you’re going to be short on cash for a while, then you have to realistically assess what the short-term future of your business is.
If you are unable to meet your payroll obligations during a pay period, do not be surprised or offended if there are employee defections, especially among newer and lower-level workers. Remember, the company may represent your lifelong dream, but it’s unlikely all your workers feel that way, too.
Many firms turn to specialized payroll companies to handle the job. After all, it is complicated, time-consuming and usually cheaper to outsource it rather than hire someone to take care of it in-house.
Here are a few factors to look at when deciding whether to outsource management of your payroll:
- Are your wages consistent? If you’ve had the same number of employees at the same wage level for a while, with no plans to change that, then your payroll should be fairly automated, and there are several software programs that can help you.
- Do you use hourly workers? Part-timers and freelancers mix things up a bit since their hours, and thus their wages, can vary week to week. Also, different tax rules may apply.
- What is your turnover like? If you expect a lot of turnover, than it will be very time-consuming to fill out the paperwork every time a new employee is hired. A payroll firm can do this for you.
- What is your corporate tax responsibility? Most companies pay quarterly federal and state taxes, but some small businesses may only have to pay annually, depending on their size and the state’s regulations. A payroll company can assist in figuring out these payments, although it may cost you extra.
- Pick a company that has experience with similarly sized businesses. Turnover is high in the payroll management industry, so try and talk to existing customers to gauge their satisfaction. Also, find out if the service firm has clients in your area and is familiar with the local tax laws that apply to you.
- Find out if payroll management is the firm’s main function or an afterthought. Many service firms offer payroll as an ancillary service, so they may not be committed to meeting your needs.
- Make sure the firm is bonded and insured. Smaller companies may not be, and this can lead to trouble if the firm mishandles your funds.
- Explore what other services the firm can offer you. Some firms will charge a lot to cut special checks, but the nature of your company may require this.
- Watch out for early low-fee offers. This is fairly common, but of course the firm will seek to make up the loss at some point. This usually comes in the form of additional fees or aggressive sales upgrades.
- Examine the service firm’s infrastructure. Some payroll firms consist of just a few employees, so make sure someone will always be available to answer your questions, even if your primary contact is on vacation. Also, if you foresee growth in your company’s future, check to make sure the service firm can handle a bigger workload as you add employees. It can be costly and time-consuming to switch payroll firms.
- Inquire as to possible penalties. Payroll firms are efficient when the information from their clients comes in on schedule. If, however, you do not submit your data on time, your paychecks may arrive late or you may be assessed a penalty. Also, there might be a fee associated with cutting a check as opposed to having the payroll firm do direct deposit.