Did you know that if you do not manage payroll correctly and it is not in order, the IRS can fine you up to 15% of any outstanding withholding taxes? However, besides potential IRS fines and penalties, mismanaged payroll can have a lot of other adverse effects.
These include disgruntled employees, increased costs, administrative inefficiencies, non-compliance around data protection, and miscalculation around overtime. Sloppy payroll can also lead to low levels of employee retention, something which comes with a lot of hidden costs.
Fortunately, there are ways to streamline and manage payroll so that these things don’t happen. If you want to learn how to manage payroll like a pro, read on as we walk you through the essential elements of a reliable payroll system.
Step 1: Use a Reliable Payroll System to Manage Payroll
According to research, over 50% of the U.S. workforce has experienced problems with their paychecks. As mentioned above, payroll and paycheck issues can lead to low employee retention rates.
One of the ways to ensure that employees receive accurate paychecks is to invest in a reliable payroll system. A dedicated payroll system will help to minimize errors, keep your payroll documents organized, get withholding taxes paid on time, and ensure tax documents are filed correctly.
Depending on the service you choose, here are some of the features you can expect:
- Automatic calculation of deductions for withholdings (including taxes, state benefit payments, and insurance and retirement contributions)
- Processing of direct paycheck deposits
- Generation of tax forms
- Deduction of wage garnishments
- General reporting
- Time and management reporting
- Automatic updating of tax codes
- Streamlined expense and travel claims
Besides these standard features, many payroll applications also allow for self-service by employees. This means that employees can log in to check things like overtime pay, sick leave, and vacation days. What’s more, with systems that allow for self-service, employees can also maintain their own personal details, which helps to cut down on errors and saves time.
While it is possible to set up a manual system for payroll, this requires tight organization and a solid knowledge of payroll to ensure that errors are kept to a minimum. In many cases, investing in payroll software can be an easier and more efficient option. If you want to get started finding a suitable software solution, you can read this post on how to choose the best payroll service for your business.
Step 2: Consider Time Tracking Software
If you are going to be using a payroll service, you might not need to invest in a time tracking software. Many payroll applications include this feature. However, if you are setting up a manual system, then you should probably look at purchasing a stand-alone time tracking software solution.
Manual time tracking is open to errors and increases payroll workloads. Besides making payroll easier, time tracking solutions also allow you to generate reports of how employees spend their time and how long it takes them to complete specific tasks. This kind of data can be invaluable and will help you to efficiently manage payroll.
Step 3: Apply for Your EIN
Once you have established the basis of your payroll system, you will also need to apply for an EIN (Employer Identification Number). Without this number, you won’t be able to summit withholding taxes, so you must apply for it ahead of time.
Depending on where you are located, you may need to apply for an EIN with both the IRS and your state. For an IRS EIN, you can apply online through the IRS website. For a state EIN, you will need to apply through your state-specific resource site.
Step 4: Ensure That All Employees Fill out a Form W-4
The next vital step to administer payroll is to ensure that all employees fill out a Form W-4. This is crucial, because on their Form W-4s, employees will stipulate how much withholding tax you need to keep back and pay over to the IRS for them.
Before you can handle a payroll cycle, you need to have this information; otherwise, your employee’s withholding taxes will be thrown off. Take note that Form W-4s need to be kept on record for all current employees.
Form W-4s from ex-employees need to be kept for four years after employment termination. Besides Form W-4s, new employees also need to complete Form I-9. This form verifies their employment eligibility in the U.S. and it should be completed prior to their first day of work.
Step 5: Structure Your Payroll Schedule to Help Manage Payroll
An essential aspect of how to manage payroll is setting up a comprehensive payroll schedule. Most businesses in the U.S. operate on either a monthly, biweekly (every two weeks), or weekly payroll schedule. You can choose to allocate different payroll schedules for different types of employees.
Monthly payroll schedules are typically the simplest to manage and require fewer times running of the payroll. If you are utilizing payroll software, you can usually automate payroll schedules within the application. If you are doing payroll manually, then you should set up a payroll and tax filing calendar. This calendar should also include important tax dates such as filing deadlines.
Step 6: Plan For Tax Filing Dates
Most businesses are required to file IRS Form 941 (Employer’s Quarterly Tax Return) every three months. The filing deadlines are generally at the end of January, April, July, and October. However, if the filing deadline falls on a public holiday or a weekend, then the due date will be the next business date.
If your business makes less than $1,000 in annual income that is a tax liability, you can instead file IRS Form 944 (Employer’s Annual Federal Tax Return).
Step 7: Schedule Submissions of Form W-2s
The final component in the step-by-step payroll process is to submit Form W-2s for all of your employees annually. Form W-2s state how much withholding taxes you have paid over for each employee, as well as their total earnings for the year. These forms also need to be distributed to your employees.
Step 8: Don’t Forget About Independent Contractors
Do you use independent contractors in your business? If so, you have a payroll responsibility to them too. While you won’t have to submit withholding taxes for independent contractors, you will have to fill out Form 1099-MISC if you paid them $600 or more over a year.
Note that you will need to submit Form 1099-MISC to the IRS and send a copy to the independent contractor.
Do You Want to Manage Payroll Like a Pro?
If you do not manage payroll properly, payroll errors can lead to employee frustration, wasted resources, and, in some cases, IRS penalties. If you want to reduce stress, regain lost time, and manage payroll like a pro, take a look at our payroll services.
We pride ourselves on providing some of the most affordable, cost-effective, and comprehensive payroll services on the market. If you have any questions, please contact us and financial advisor with gladly answer any questions that you might have.