According to IRS estimates, one-third of organizations make at least one payroll error a year. The consequence isn’t just fixing mistakes (although you should do that, too). Payroll errors also lead to fines – $7 billion in 2021, to be exact.
It’s no wonder 40% of small business owners believe managing payroll and taxes is the worst part of owning their business.
Whether you’re a company of 10 or 10,000 employees, getting payroll right every time is critical. That means adhering to payroll best practices, such as developing a solid compensation plan, maintaining compliance, and paying people equitably.
Below are ten payroll tips to know so you can plan and manage payroll confidently.
1. Put a Payroll Policy in Place
Want to avoid disorganized and inefficient processes? Start by putting a payroll policy in place. In short, a payroll policy serves as a single source of truth that payroll administrators can follow. Moreover, it provides preferred guidelines so your team can accomplish payroll tasks accurately and efficiently.
That last part – efficiency – is a game-changer when managing payroll. According to Score, a mentoring service for businesses, 63% of small business owners underestimate the time payroll takes. As a result, leaders must shift priorities and potentially miss other deadlines to file payroll on time. It’s no wonder 50% of owners think this process is frustrating.
Thus, when constructing your payroll policy, assess the process, time, and resources needed to draft your plan and pay your people each month.
Consider including the following:
- An outline of the payroll process
- Employee classification specifications
- Determining factors for salaries and wages
- Reporting obligations for employees
- Instructions and procedures for resolving payroll mistakes
- Levels of earnable vacation time
- Guidelines on how to calculate wages and promotions
2. Set a Payroll Budget
Payroll expenses shouldn’t be a surprise. Plan salaries, bonuses, and other payroll expenses accordingly so you have the proper financial runway needed to compensate employees.
Employers are also legally responsible for certain employment taxes, such as Social Security and Medicare. For example, employers must match the Social Security and Medicare deductions from an employee’s compensation, which amounts to 7.65% of gross pay and the employee’s salary or hourly wage. Payroll taxes vary by state, so it’s critical to consider this information when budgeting.
To ensure that the spending won’t harm the company’s finances, budget by calculating overall payroll costs as a proportion of revenue.
No more crunching numbers or using rough estimates – payroll software takes the guesswork out of payroll totals and deductions.
3. Accurately Categorize Employees
One crucial piece of payroll advice is to cross your t’s and dot your i’s. More specifically, you want to double (or triple) check everything, including accurately classifying your people.
Misclassifying people as employees or independent contractors is more common than you think. The Economic Policy Institute estimates that 10-20% of employers misclassify at least one employee.
Proper classifications are important since state and federal agencies use tax revenue (income, Social Security, Medicare, and unemployment taxes) to provide public services and benefits.
Once you’ve accurately classified workers as employees, you should further categorize them by hourly or salaried employment. From a legal standpoint, you’ll need to know that:
- Hourly employees are entitled to protection under the Fair Labor Standards Act (FLSA) and must receive overtime pay if they work more than 40 hours per week.
- Salaried employees may not be subject to FLSA overtime regulations.