Last year, the IRS assessed $13.6 billion in civil penalties for employment tax issues. And part of that total? Penalties for payroll mistakes. As a small business owner or manager responsible for handling payroll, you know that accuracy is key—not just to avoid fines and penalties, but to pay your employees what they’ve earned and to manage your cash flow.
But running payroll is complex and time-consuming. It typically takes small business owners five hours per pay period to process payroll, totaling a whopping 21 days per year. So, the question is, how can you cut down the time and money you spend on payroll while making sure you pay employees correctly, avoid penalties, and maintain accuracy?
And the answer? By getting better at payroll processing. Let’s find out just how to do that!
10 Payroll Tips for Small Businesses
Want to improve your payroll processes? Here are 10 payroll tips to help you save costs, pay your employees and contractors accurately and on time, and protect your business from costly fees, fines, and penalties.
1. Decide How to Pay Your Employees
Employees can earn either an hourly wage or salary, depending on your business, the type of job roles you need to fill, and—to an extent—your preference. But what you choose between paying wages, salaries, or a mix of both can add to the complexity of calculating your payroll.
Hourly employees are paid a set hourly wage for every hour they work. For example, an hourly full-time employee who earns $20 an hour would take home $800 per 40-hour workweek (before taxes).
On the other hand, salaried employees earn an annual salary spread out evenly across pay periods. For example, a salaried employee who earns a yearly salary of $50,000 would take home $1,041.67 per week (before taxes).
Where things get tricky is determining which employees are exempt or non-exempt from the Fair Labor Standards Act or FLSA (but more on that later!).
Employees who report to management, perform repetitive and/or physical tasks, and who earn less than $684 a week or $35,568 a year are non-exempt, which means they’re entitled to overtime pay for any hours worked beyond a regular 40-hour workweek.
On the other hand, employees who earn more than $684 a week/$35,568 a year and have certain job roles, like executives, managers, and salespeople—are exempt, which means they’re not entitled to overtime.
This can make calculating payroll complex, especially if you employ both non-exempt and exempt workers!
2. Figure Out When to Pay Your Employees
Your pay schedule determines how often you need to process payroll—and when your employees are going to get paid.
Keep in mind that payroll isn’t processed immediately. This means that if payday is on a Friday, you can’t run your payroll on Friday morning and expect your employees to receive their paychecks by that afternoon.
Even after you finish processing your payroll, it takes about one to three days for your bank to transfer funds to your employees if you’re paying via direct deposit (the method by which 93% of employees are paid).
This means you should generally try to start the payroll process about four days before your employees’ payday (though this can differ depending on your chosen software and bank).
And if you issue paychecks on payday, your employees should understand that it might take a day or two before their deposit clears—and that their money might not be available immediately.
This means you need a payroll calendar that specifies which days to run your process, leaving enough time for you to calculate and submit payroll—and for the bank to process transactions.
3. Accurately Classify Team Members
How you classify your workers—as either employees or independent contractors—impacts which taxes you need to withhold and pay.
An employee’s classification also determines if they’re entitled to benefits, which may require employer contributions—like a 401(k) match—or need to have taxes withheld (depending on the benefit). And if your employees accrue any paid time off (PTO), you need to track—and pay out—any PTO when you run your payroll.
Employee misclassification—claiming an employee is a contractor (or vice versa)—can result in significant fines, tax penalties, and even potential lawsuits for unpaid benefits and overtime. Which is why classifying team members correctly is so important.
So, how do you determine which team members are employees—and which are independent contractors?
If you expect to have control over when, where, and how a worker does their job, they’re more than likely an employee—and, as such, entitled to benefits and overtime, in addition to being subject to Medicare, Social Security, and unemployment tax withholding.
On the flip side, if a worker has more freedom to decide how and when they do their job, they are likely a contractor—and not entitled to any benefits or subject to tax withholding.
4. Create a Payroll Policy
A payroll policy is a document that outlines the steps that go into running your company’s payroll. It should also detail:
- How and when to pay employees
- How to classify workers
- How to fix any mistakes (including contact information for your payroll service)
- How to calculate payroll taxes, employee benefits, and overtime (including how employees accrue time off)
- When and how employees are eligible for bonuses and raises—and how to include those in payroll
- Contact information for your bookkeeper, accountant, or payroll vendor (even if you’re outsourcing your payroll)
- Any other details and/or instructions about managing payroll at your company
So, why do you need this document? Not only does a policy give you a guideline to follow whenever you manage payroll, but it makes sure that your process is easily repeatable by someone else—say, in the event you get sick, no longer have time, or move on from the company.
This helps keep payroll consistent, no matter who’s responsible for handling it—which can minimize mistakes and ensure that your team is paid properly.
Bonus tip: Need an effective and convenient payroll processing solution? Try Hourly. With the tap of a button, you can run payroll as often as necessary, track time and attendance, handle your payroll taxes and workers’ compensation insurance premiums, and cut down the time you spend on payroll management.
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5. Set a Budget
It costs money to run your payroll—which, depending on your setup, can include paying for payroll software, the labor cost of actually running your company’s payroll, and/or outsourcing to a payroll specialist or provider.
But in addition to the costs around payroll, you also need to budget for the cost of payroll itself—or, in other words, how much cash you need to pay your employees and cover any taxes.
Why? Having an accurate budget helps ensure you can cover the upfront cost of managing your payroll without sending your cash flow into the negatives—ensuring all of your employees are paid fully and on time.
It can also help you avoid penalties for nonpayment or underpayment of any taxes you’re obligated to pay (since you’ll have enough cash on hand to cover tax costs).
6. Keep Records and Track Cash Flow
Some documents, like pay grade increases and timecards, need to be kept for two years. Others, like employment records for non-exempt employees, need to be saved for three.
And the IRS requires you to keep payroll tax records for four years. So, the best suggestion for your business? Keep and maintain your employment, payroll, and tax records for a minimum of four years (though it’s recommended you keep them all for six years, just to play it safe).
This also means you need to maintain accurate bookkeeping records so you know where your money’s going, how it’s generated, and how much is available to spend—as that information is critical in planning your payroll and identifying any issues that could prevent you from paying your employees on time.
For example, if you have a slow month and don’t pull in enough revenue to pay your employees, keeping accurate records can help you identify your cash flow issues—and, more importantly, figure out a way to deal with those issues so you can get your team paid.
An accurate and up-to-date payroll register is also important for defending against—or resolving—claims of inaccurate pay or unpaid or underpaid taxes.
7. Familiarize Yourself with State and Federal Regulations
If you want to avoid tax penalties or claims of unpaid wages and benefits (and what business owner doesn’t?), complying with federal and state laws and regulations is an absolute must.
These laws stipulate how to classify workers, the maximum amount of time allowed between paydays, which records to keep (and how), and other requirements.
Laws you’ll want to familiarize yourself with—and abide by—include:
- Fair Labor Standards Act (FLSA): A federal law that stipulates minimum wage, overtime pay (including how to define exempt and non-exempt workers), hours worked, recordkeeping, and child labor restrictions.
- Equal Pay Act (EPA): A federal law that amends the FLSA to protect against wage discrimination based on sex.
- Federal Insurance Contributions Act (FICA): A federal payroll tax of 15.3% (with half paid by you and half paid by the employee) that is withheld from each employee’s paycheck to contribute to Medicare and Social Security.
- Federal Unemployment Tax Act (FUTA): A federal law that requires employers to pay a tax (amounting to 6% of an employee’s first $7,000 of income, or an annual total of $420) to help fund the state’s unemployment insurance program. (Some states might also require you to pay state unemployment taxes, or SUTA, which reduces your overall FUTA obligation.)
- Local laws: City- and state-specific regulations based on where you live (which can be found by contacting your local government and state Department of Labor). For example, California requires employers to establish a regular pay date and give staff information about when, where, and how they’re paid. Workers also need to be paid before the 26th of the month for any income earned between the 1st and 15th.
- Workers’ compensation insurance: This helps cover your employees’ expenses if they get injured or ill while on the job. Premiums are based on your total payroll.
8. Follow an Onboarding Process for New Hires
Whenever you hire a new employee, you need to set them up in your payroll system to make sure they’re paid and receive all of their benefits—and that you’re paying the right amount of employment taxes. And if you want that process to go as smoothly as possible? You need a clear onboarding process.
An onboarding process is a step-by-step guide for making sure your new employee is situated in the workplace. In addition to giving them the necessary training and introducing them to the rest of the team, you should also require them to fill out certain payroll-related documentation and forms, like:
- Form I-9, which verifies employee information and authorization to work in the U.S.
- Form W-4, which makes sure you withhold the right amount of taxes for your employees
- Form W-9, which verifies the identity and tax information of any independent contractors you pay
- State tax and withholding forms, like those required by California
- Direct deposit forms, which include an employee’s bank information so you can transfer funds directly to their account
By including these requirements when onboarding new employees, you can ensure you have everything you need for payroll from the get-go.
9. Use Payroll Software
Payroll is complex, which means there’s a lot of room for (potentially costly) errors. And even if you’re not dealing with errors, you're spending tons of time on data entry and crunching numbers instead of growing your business, mentoring your employees, and serving your customers—which is why reducing the amount of time (and energy!) it takes to manage payroll is so important.
One solution? Using tools like Hourly. These services compress the hours you’d spend handling payroll into minutes, allowing you to automatically withhold taxes, issue checks and direct payments, and handle time-tracking and attendance logging—all from one easy-to-use platform. The result? An accurate and streamlined process that saves you money, time, and stress while protecting your employees and your small business.
10. Audit Your Payroll
Employee complaints about incorrect payroll information can result in low morale and a lack of trust in your organization—not to mention potential legal challenges if the issue isn’t resolved.
One of the ways to avoid these concerns—and avoid the potential turnover or legal trouble that come with them? Consistent payroll audits.
So how do you audit your payroll process?
- Verify that your payroll records match other financial statements from other software, tools, and vendors (like your bank or accountant).
- Check (and re-check) any employee information input into the system by employees themselves (like hours worked, mileage, and even information about their identities).
If, during an audit, you identify any payroll mistakes, communicate them to your employees—and take whatever steps are necessary to fix them.
Frequently Asked Questions
What is payroll management?
Payroll management is the process of calculating —and paying out—your employees’ wages or salaries. Managing payroll includes:
- Figuring out what information you need—and collecting it
- Deciding how and when to pay your employees
- Outlining your payroll processes
- Choosing a payroll system or provider
- Calculating wages, salaries, and taxes
- Running payroll and paying employees
- Maintaining accurate records and bookkeeping
It’s a lot to manage, and the result can be increased labor costs, wasted energy, and a whole lotta potential for error—which is why becoming better at payroll is so important.
How can I get better at payroll?
You can get better at payroll by using payroll software to calculate wages and taxes, pay your team, keep track of laws and regulations, and help you stay organized.
How can I learn payroll fast?
You can learn payroll fast by:
- Getting payroll software
- Asking your accountant, CPA, or current payroll provider to train you
- Consulting your payroll service’s website for tutorials, resources, and other learning opportunities
- Hiring a mentor through organizations like SCORE to provide hands-on guidance
- Taking courses provided by PayrollOrg (PAYO), the combination of the American Payroll Association and the Global Payroll Management Institute
- Reading up on federal and state laws on the IRS website and your state’s tax division website
Use These 10 Payroll Tips to Save You Time and Stress
You can’t avoid managing payroll—but you can avoid the potential issues that come from making mistakes or spending too much time crunching numbers.
By following these 10 payroll tips, you can simplify the entire process while improving accuracy, making sure your employees are paid properly (and on time!), and avoiding costly legal fees and tax penalties—protecting your cash flow, revenue, and your company as a whole.