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Payroll best practices for your small business

If your business has employees, you'll need a system to handle payroll either in-house or externally.

Many small businesses still handle payroll internally, but it's a time-consuming process that's prone to mistakes, especially with frequent changes to the tax code. Your time is valuable, and it may be worth the expense either to invest in payroll software or outsource these critical tasks to a qualified third party.

Here are some questions to review when trying to find the best payroll service for your small business or choosing an outside provider.

Who should use a payroll service?

If your staff is small, stable and salaried, and if your tax obligations remain constant, you may have no trouble processing payroll internally. Payroll software for small businesses (such as QuickBooks®) can help you or your bookkeeper manage the company's payroll and related tax requirements. But even with the right software and a steady employee situation, payroll tasks can eat up a significant amount of time.

If your company payroll does fluctuate per pay period, it might make more sense to outsource this important job. Here are 4 questions that may help you determine if you should use a payroll service:

  1. Do you have hourly employees who work part-time, varying hours or earn overtime?
  2. Does your small business have a lot of turnover?
  3. Is your business a seasonal one with large swings in staffing?
  4. Are you paying payroll taxes in more than one state?

These common scenarios can quickly complicate your business's payroll and tax situation. Using an outside payroll service in these instances may prove more cost-effective in the long run.

Both software and payroll services help eliminate errors by automatically calculating employee withholding and the employer's payroll tax obligations.

What type of payroll service is right for your small business?

If you decide that it makes sense to use an outside payroll service, be sure to spend adequate time investigating the right one for your type of business. Payroll services do much more than cut paychecks. In addition to printing and delivering checks, their basic services typically include:

  • Calculating employee pay, withholding and taxes
  • Providing automatic signatures and direct deposit
  • Employer tax payments and filing, as well as processing W-2 and 1099 forms
  • Benefits administration for health insurance, flexible spending accounts and retirement plans
  • Tracking paid time off, sick days and overtime
  • HR forms management
  • Filing required reports with federal, state and local governments

Many online payroll services for small business also allow employees to edit their benefits information and contributions directly via the internet.

In general, a payroll service can cost anywhere from $20 to $100 per month for only paycheck processing. The price goes up as you add features, so you’ll want to decide which services you need and prioritize them. Many services beyond the base package are offered a la carte, so it's important to understand your needs in order to compare costs. If you're a seasonal business with significant employee churn, be aware that some payroll programs charge additional fees for adding or dropping workers. See Bank of America’s Payroll services for small businesses

Payroll services handle your employees' sensitive data and pay the IRS on your behalf, so be sure to choose one that is bonded and insured. Ask for references and interview other clients about their satisfaction. Ask fellow business owners for their recommendations. Here are some other questions to ask:

  • What is the total cost for one year of service?
  • If a payroll mistake is made, how quickly can it be corrected and what will it cost?

How to set up a payroll system

  1. The first thing you need to start paying workers is an Employer Identification Number (EIN) from the IRS. An EIN is required for reporting taxes and information about your employees. To apply for an EIN, go to the IRS website.
  2. You must complete paperwork as an employer for filing payroll taxes and for your employees' withholding.
  3. Check with your state and local tax authorities about whether they require their own state tax ID numbers.
  4. New salaried employees must fill out Form W-4 so that the company can withhold federal income tax from their pay.
  5. Check whether your workers qualify as employees or independent contractors and report them appropriately to the IRS. Employers are not responsible for withholding taxes for independent contractors, nor do they have to pay taxes on their compensation. They do have to provide these workers with a 1099 statement at the end of the year, though, indicating the amount of money they were paid.
  6. Next, determine your pay period. You can choose the interval that suits your business best. Be aware, however, that pay periods are sometimes determined by state law, with most favoring bi-monthly payments.
  7. If you use a payroll service, make sure your tax reports are being submitted correctly (they may be due quarterly or annually). Find out more about federal tax filing requirements at the IRS' Employer's Tax Guide.
  8. The U.S. Small Business Administration recommends that business owners carefully document their employee compensation terms. That's how you handle and track paid time off, sick days, employee hours and overtime. Deductions such as insurance premiums and retirement contributions will also need to be withheld from paychecks and paid out accordingly.

Time and money are valuable to every small business owner, and payroll can take a big bite out of both. With a little research and planning, you can be confident you've made the right choice for managing all of your small business payroll responsibilities, both for your company and your staff.

   
 
 
 

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