I’m going to step out on a limb and guess you try to treat your employees right. If you’re like many of our clients who run their own small businesses, you likely want to be more involved and more invested in your employees than the typical leaders of big corporations are. And since money talks, paying your team members fairly and on time is a big, big part of that.
But wanting to do the right thing and being able to do it the right way aren’t always synonymous. Even with the best intentions, many small business owners find themselves in over their heads when it comes to processing payroll for their businesses.
Before you get in too deep, here are a few things to help you better understand payroll.
1. Making a payroll mistake could cost you a lot.
Why? The Internal Revenue Service (IRS) themselves will admit small businesses are the most likely target of increased tax compliance enforcement. Because according to IRS, local, independent businesses are the largest source of uncollected taxes. And according to Entrepreneur, 1 in 3 small business owners get penalized by the IRS for payroll errors.
1 in 3 small business owners get penalized by the IRS for payroll errors.
In the last year, the average payroll penalty paid out was $845. Unless you have nearly a thousand bucks laying around, this stat should put a pretty big pit in your stomach. Not just because there’s a very real chance you could owe the IRS money totally unknowingly, but you could also be committing a federal crime simply because you’re out of the loop. As it turns out, ignorance is not at all bliss when it comes to the IRS.
The IRS tends to focus their attention on small businesses especially during economic downturns. So if you don’t understand payroll law, get to know it. A couple quick reminders:
- Borrowing against payroll is against the law.
- Business owners can be held personally and individually responsible for payroll taxes owed. This is thanks to something called the Trust Fund Recovery Penalty (TFRP).
- There are actually five types of business taxes to watch out for.
- How you classify employees, as contractors or W-2 employees, matters too. Incorrect classification can lead to significant penalties.
2. The frequency at which you pay your employees matters more than you may think.
How often do you pay your team members? Your most common choices are weekly, biweekly, semimonthly or even monthly. But these aren’t choices to be made on a whim. The state in which the employer conducts business will usually establish the pay frequency for the employees, based on an employee’s classification: exempt or nonexempt.
Luckily, the U.S. Department of Labor offers online resources regarding wage and hour labor laws.
3. You have a few options when it comes to managing payroll.
Like many back-office topics we discuss, payroll can be a do-it-yourself (DIY) process, or you can choose to automate or outsource it. It’s all about how involved you want to be, or need to be, based on your time constraints. How involved you get is up to you, but you have a few basic options.
- Do it yourself. In 2013, nearly 60% of small businesses said they handled payroll in house. This option involves spreadsheets and a lot of manual bookkeeping. Of those 60%, nearly 25% reported spending more than six hours on payroll per month. That’s at least 72 hours per year, or nearly two full workweeks. Yikes.
- Choose a system to automate it and manage it for you. Basically, you’ll handle payroll tasks from within a tool that’s meant to make it easier to manage. There are a few popular options out there (and plenty more not listed here):
- Hire it out. More than a third of the small businesses that outsource their payroll say they spend more than $500 per month–that’s more than $6,000 in outsourced payroll per year. So while it could chip away at profits, these businesses save significantly in man-hours and much-needed time.
It doesn’t matter so much which direction you go, though we’d urge you to move toward an automated solution. What matters most is you fully understand payroll, do your research, and find a solution that suits your lifestyle, your team, and your business.