Payroll made simpler

Managing payroll can be an arduous task for small business owners. Cutting those paychecks — while staying in compliance with federal and state agencies — is a big responsibility for employees and for the company.

Getting it right matters

With payroll tax withholdings being a major source of revenue collected by the IRS, the agency takes mistakes in this complex area seriously. Businesses that file late or withhold the wrong amount from employees’ paychecks may be charged penalties and/or interest even if it was the result of an honest mistake.

Some keys to managing payroll are setting it up properly, staying organized and keeping the payroll system as simple as possible. There are also many relatively inexpensive payroll service providers to help small business owners that may not have the time to manage it all.

By staying on top of payroll, small business owners can have critical records at their fingertips if they need to apply for funding, such as a loan. And knowing exactly how much of overall expenses are going toward payroll may also help small business owners keep their budget and spending on track.

Steps to streamline the payroll process

Setting up a system

Some business owners DIY their payroll taxes with the help of accounting software. Other small businesses hire bookkeepers or accountants to get them organized. And still others may outsource the setup to a payroll service provider. Some of these providers may allow small business owners to pull critical data points into an online banking dashboard so business owners can keep up to date on information that matters for their business.

As part of the setup, small business owners may need to establish tax accounts with federal and state governments, including the governments of states where they have employees. Sometimes state governments may require businesses to set up more than one account, such as an income tax account and an unemployment tax account. Business owners should consult with their tax advisor for more information on establishing tax accounts.

Paperwork is crucial

It is important for business owners to stay on top of the paperwork they and their employees need to complete. This includes having each employee complete a Form W-4, which helps determine how much federal income tax to withhold from that employee’s paycheck (similar forms are used for state tax purposes), and providing each employee a Form W-2, which is the annual report of wages paid and taxes withheld for that employee during the taxable year. (In the case of independent contractors, business owners may need to provide them with a Form 1099-NEC to report nonemployee compensation.)

Additionally, business owners may need to file forms on behalf of their business to state and federal governments to let them know how much in taxes the business has withheld and remitted, and the business owner may need to file annual federal and state (and potentially local) income tax returns. The IRS provides a list of employment tax forms, which may also be found on each state treasurer’s website. Setting up a filing system, whether it’s digital or paper — or both — may be helpful to keep records handy when needed.

Classifying employees correctly

From the point of view of the taxing agencies, the fundamental question when it comes to paying employment taxes is whether a worker is an employee or an independent contractor (freelancer). Businesses are responsible for withholding taxes from the paychecks of employees but not from the payments made to independent contractors. A worker’s classification depends on multiple factors, so when in doubt, business owners can consult the IRS’s guidelines or an accountant, tax specialist or attorney.

It is important to keep up with both federal and state taxes. Federal taxes include federal income, Social Security, Medicare and unemployment tax. States may levy some taxes including state income tax and state unemployment tax. Certain localities may also levy their own income or other taxes.

Committing to being organized

If a business has hourly employees, it may need a system for keeping track of hours worked. Some payroll providers allow employees to clock in through their systems, automating that part of the process. If the business owner is manually entering information like hours worked or wage garnishments, it might be helpful to develop a system to input the information regularly.

Watching those deadlines

Employers need to keep track of the deadlines for sending employees and independent contractors their annual earnings and tax summaries. Here’s a deadline guide from the IRS. Most payroll service providers will send reminders of upcoming deadlines, trigger payroll automatically and file tax returns for the business automatically too.

Handling payroll may not be a small business owner’s favorite task, but the more organized and methodical the business owner is, the more manageable the process can be — and the more time they’ll be able to spend on the business activities they enjoy.