For entrepreneurs, small business payroll is a weekly chore that can breed costly mistakes. Inaccuracies can lead to both short-term financial losses and much costlier long-term tax problems and penalties. Payroll entails handling the most sensitive information that both you and your employees possess. Payroll problems are the final straw that sinks many businesses. Doing it yourself comes with pros and cons, as does outsourcing.
Follow this guide to making payroll as quick and painless a process as possible.
The simplest and most obvious way to take the headache out of doing payroll is to dump it off on someone else. Hiring a payroll filing company is a fairly simple task, but doing so comes with a few positives and negatives you must consider first.
Pros: A professional firm that specializes in payroll has the skills and knowledge to do it right. A payroll company keeps up with the complicated and constantly changing rules and codes governing taxes, how they’re calculated, and the paperwork with which they’re filed.
A professional firm is much less likely to make costly mistakes, and if one of their staff members who is dedicated to your case quits, gets sick, or is fired, he or she can easily be replaced with a well-trained substitute without you or your business even noticing a hiccup.
Also, security is less of an issue when your very sensitive information is stored on the secured, reinforced servers of a professional payroll company.
Cons: The obvious con of outsourcing is that it isn’t free. The cost of outsourcing payroll falls under the category of overhead – a fixed, recurring fee you have to pay every week or two weeks or every month.
More importantly, whether you outsource your payroll or not, your tax obligations are yours alone. Whether or not you hired someone to do it for you, any classification mistakes or filing errors are your responsibility, and the legal and financial ramifications will fall squarely on your shoulders.
In House: Keep it Small
If you keep your payroll duties in house, dedicate more than one but not more than just a few employees to the task. Make the responsibility theirs and theirs alone on a specific day each pay period.
One employee is not enough because eventually that employee is going to get sick or get married or take a vacation or leave for a different job, which will leave you in the very unfortunate position of having no one on hand who can handle your payroll. When it falls on the shoulders of two or three trusted, long-term employees, it will be much easier to maintain accountability, and you’ll be able to contain the most sensitive financial information of both your business and your employees to just a few pairs of trusted eyes.
Salaried employees are easier on payroll than hourly employees. There are a million reasons that have been hashed over in a million different articles about the benefits of hourly vs. salary, but when it comes to payroll, the discussion is settled.
Salaried employees make the same amount every week or two weeks or whatever your pay period is. This means no tallying timecards, where the most potential mistakes are buried. It also means net pay, gross pay, and withholdings can literally be calculated once and then pasted for the rest of the pay periods.
Unscrupulous business owners may intentionally misclassify workers – such as counting employees as contractors – to avoid paying taxes. The IRS and state tax agencies are well aware of this trick. A single classification error can send up a red flag that triggers an audit.
Whether or not your intention was malicious, a single classification error can lead to costly and serious consequences. If you do your payroll in house, it is your responsibility to learn the most recent and accurate governmental regulations and standards regarding employee classification. Appearing to the IRS as a business owner who is shady with classification is a sure way to get on a list you don’t want to be on.
Be on Time and Accurate
Filing late will lead to penalties. There are virtually no exceptions to this rule. As many as 40 percent of businesses incur fees of close to $900 every year due to mistakes or missed deadlines.
Don’t trust that your employees will fill out their paperwork correctly. Many will not. Check and double check that each form is filled out and filed correctly. Perhaps most importantly, make sure that they are signed! Paperwork turned in without a signature will be returned, which could lead to late filing. Keep a cheat sheet or sample page for every tax form required of you and your employees to use as a cross reference for the actual forms.
You have to do payroll consistently, correctly, and on time – every pay period. It’s one of the areas in business in which there is simply no room to cut corners. Your employees’ paychecks, your company’s financial well-being, and your good standing with the IRS and state tax authorities are at stake.
There is no one method that is right for every business. To keep it in-house or not is determined by your size, resources, capability, and temperament. Be honest about your abilities, and if you keep it in the company, be meticulous and thorough. Either way, get it right the first time, every time.
Photo Credit: Flickr/401(K) 2012