Payroll Management: 5 Reasons Why to Use It

Keeping clean records for payroll is essential for all businesses. Not only do your employees need to be paid accurately, but you also need to save the payroll information for your tax purposes. This is easier said than done for some small business owners, especially those who don't have financial backgrounds. The payroll process comprises many moving parts and small details, all of which are important to record.

If you are worried about accurately submitting payroll as you expand your business, consider setting up a payroll management system to make the process easier.

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What Is Payroll Management?

Payroll management is the process of organizing and issuing payments to employees and contractors for their work. Along with managing each weekly or biweekly payment, the management system will help your team prepare taxes and determine your company's profitability. Some payment management systems also automatically adjust payroll based on the amount of sick time or unpaid leave an employee clocks.

5 Reasons to Use Payroll Management

There are several reasons to use a management system to issue payroll for a small business. While you might not think you can afford the existing payroll software on the market, the amount of time you save and stress you avoid can significantly outweigh the costs. A few reasons to use payroll management include:

  • It saves time: Payroll systems can automatically calculate the amount of money each employee is owed based on their hourly or salaried rate. These systems can also adjust the rates based on taxes and paid time off. When your system automatically calculates your payroll, you can save several hours each week by not having to do it yourself.
  • It maintains correct information: There is a large amount of room for human error if you manage the payroll for your employees on your own. You might use the wrong formula in your payroll spreadsheet or accidentally input the wrong number. These errors can be frustrating for employees, but they can also impact your taxes and draw the attention of the IRS.
  • It's cost-effective: The initial investment in payroll software might seem like a lot, but the benefits outweigh the costs. Remember, time is money. You can use the time you save completing payroll to improve other parts of your business instead.
  • It's secure: Most payroll management tools follow strict security protocols to protect their customers. If they didn't, they would go out of business. This makes a management system more secure than internal spreadsheets, which can get lost or accessed by other team members.
  • It optimizes the entire process: Once your payroll process is up and running, you don't have to think about it. Onboarding new team members, paying existing employees, and filing taxes all become much easier, even if you don't have a financial background.

As you can see, the initial startup costs and time required to set up a payroll system are worth it to your team in the long run.

4 Steps to Successful Payroll Management

Even if you only have a couple of employees, payroll management is an essential part of running a business. Your employees might believe in your vision, but they still expect to get paid — in full and on time.
Setting up a payroll management process can help you save time on accounting while making sure your employees get paid and have the tax forms they need.

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1. Determine Which Payroll System to Use

There are multiple payroll options to choose from depending on the size of your small business and your accounting needs. If you only have one or two employees, you might be able to handle payroll manually, but that process could get out of hand as you start to scale your business and hire more staff. Your payroll system options include:

  • Manual payroll: With manual payroll, you yourself track each employee's hours and the amount owed. Some companies handle this process with spreadsheets because their small staff makes it easy to manage how many hours each person worked.
  • Payroll software: Payroll software is designed to help companies scale up while making record-keeping easier. Preset forms make inputting data easy, and the system can quickly calculate taxes and other important information. This is an ideal option if you are managing payroll or have an in-house accountant.
  • Outsourcing payroll: if you can't afford to hire an accountant in-house but your payroll needs are growing out of hand, consider outsourcing. The outsourced firm will handle your payroll, and you will have access to their tax and accounting expertise. This might be a more affordable option than managing payroll in-house.

The system that is right for your business now might not work in the future. While you might be able to manage payroll manually or with a basic system now, you could grow in the next few years to the point that you need to outsource the work to a professional agency.

2. Set Up Your Payroll

In all likelihood, the most labor-intensive process will be setting up payroll for your team. After registering the account, you will need to collect the necessary information from your employees and input it into the payroll system. If you have opted for a manual payroll process, then you will have to add each employee's personal information and pay rate to your system. However, if you plan to use payroll software, your team members might be able to add this information themselves.

Once you have the payroll process set up for your employees, you will only need to add or pause records when employees start working at or leave your company. You can add a new record for each new hire and stop payroll for employees who quit or get let go.

Keep in mind that you are legally required to maintain all payroll tax records for at least four years. As you set up your payroll system, make sure you have a plan to save the records from past employees and then remove them securely after the four-year period has ended.

3. Run the Payroll System

Once you get your system up and running, it should be able to operate on its own. Your payroll department will need to review the expected pay each week and make adjustments based on overtime, sick leave, and paid time off. They might also need to make adjustments based on employee hours worked.

For example, if one employee forgot to clock out, he or she will need to adjust the hours appropriately. However, with the right payroll management software, this work shouldn't take much time — especially if you have fewer staff members in your small business.

4. Handle Payroll Taxes

At the start of the new year, your payroll team will begin to assemble tax records for your own safekeeping as well as for your team members. For example, you will likely need to issue W-2 forms to employees or 1099 forms for contractors. There are also specific records you will need to save in the event the IRS chooses to audit your business.

Along with basic information for each employee (such as name, address, and the amount and date for each paycheck), there are specific Social Security and federal unemployment tax records (for FICA and FUTA, respectively) you need to keep.

For the FICA tax records, you need to save:

  • The amount of each payment subject to the FICA tax.
  • The amount and date of FICA tax collected on each payment.
  • An explanation for any difference between the two.

For the FUTA tax records, you need to save:

  • The total amount paid over the calendar year.
  • The amount subject to unemployment tax.
  • The number of contributions paid into the state unemployment fund.
  • Any other relevant information or notes.

Your first year in business will be a learning process as you determine which documents are important for following government regulations. Each year should get easier as you understand what to save and what to send out. Fortunately, many payroll management systems offer tax help and can guide you through the filing process.

There are countless small details to consider when you open your small business. If you can set up your payroll system to run on its own (with minor updates each week), then you can focus more on growing your brand and less on accounting paperwork. Find a payroll management process that saves you time and reduces your stress levels.

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