Small Businesses Payroll Processing: FAQs for Business Owners
Having a streamlined system for payroll processing is critical to maintaining your business culture, reputation, and financial health. However, establishing a payroll system is easier said than done.
At Powered by Centri, we’re dedicated to equipping small business owners with the knowledge, skills, and resources they need to be successful. In this blog, we’ll answer nine of the most common questions about small business payroll processing and detail the benefits of outsourcing payroll processing.
1. What is Payroll Processing?
Payroll processing refers to compensating employees for their work, but it isn’t as simple as just adding up hours worked and writing checks. Employee payroll processing is a complex system that involves:
- Calculating total wage earnings
- Withholding deductions
- Delivering payments
- Keeping accurate records
These tasks can be accomplished manually, but having an automated process typically improves accuracy, efficiency, and compliance with various payroll regulations.
2. How Does Payroll Processing Impact My Business?
Paying your employees for the time they dedicate to your business is highly important. As people need money to meet their daily needs, paying employees late or incorrectly can result in legal issues and costly penalties for your business.
Aside from legal issues, inconsistent pay can also negatively impact your company culture. An unreliable payroll system leads to low employee morale, high turnover rates, and a poor business reputation.
Additionally, payroll processing cuts into your overall profit margin. If you don’t have a good payroll system in place, then you could end up in a situation where you have insufficient funds in your account to compensate employees and cover other expenses.
Considering the ramifications, it’s best to dedicate the time and money upfront to ensure that you establish a solid system for employee payroll processing.
3. Which Laws Impact Small Business Payroll Processing?
Business owners must ensure that they’re compliant with all payroll regulations set by the Internal Revenue Service (IRS), Department of Labor (DOL), and other authorities. Here are two of the main laws that impact U.S. businesses:
Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) requires employers to pay all non-exempt workers no less than the federal minimum wage, which is $7.25 as of February 2022. This act also entitles workers to time-and-a-half pay for any time logged over 40 hours in a workweek.
FLSA also requires employers to compile certain records and store them for periods of time specified by the IRS. For example, you must keep ongoing payroll records that include:
- Regular pay rates
- Total compensation
- Benefit contributions
- Total overtime hours worked
- Payment date for each pay period
This information must be continuously updated and stored for every employee for three years.
Federal Insurance Contributions Act
The Federal Insurance Contributions Act (FICA) requires that employers withdraw a portion of their employees’ gross pay for Social Security and Medicare. To comply, you must deduct 6.2% for Social Security and 1.45% for Medicare from each of your employee’s paychecks every pay period. You’re also required to match all employee contributions.
It’s important to note that payroll processing laws can vary by state in regards to minimum wage, pay schedules, and record keeping. Because regulations change, you should review payroll laws frequently to avoid potential penalties.
4. What Documents are Required for Payroll Processing?
Before you can process payroll, you’ll need to collect onboarding paperwork from your employees.
Within the first few days of employment, make sure that your new hires complete every form that you need to classify and compensate your employees properly. The following documents are generally required by employers:
- Form W-4 (or Form 1099 for independent contractors)
- Form W-9
- Form I-9
- Direct Deposit Authorization, if applicable
- Medical Insurance Forms
- Retirement Plan Documents
Again, requirements often differ by state and county, so you should also check if any additional paperwork is needed by your state and local governments.
5. Why Do I Need to Classify My Workers?
All businesses must classify their workers as either employees or independent contractors:
- Employees typically have a consistent full-time or part-time schedule and are paid hourly or salaried.
- Independent contractors usually only work as needed and are paid hourly or based on a flat-rate fee
Labor laws don’t apply to independent contractors, and businesses aren’t required to deduct pay for them. The opposite is true for employees—businesses must abide by labor laws and withdraw all necessary fees. For those reasons, misclassifying your employees as independent contractors can result in thousands of dollars in penalty fees from the IRS.
6. How Often Should I Process Payroll?
Payroll schedules are primarily based on preference; however, state laws and union agreements may impact how often a company has to run payroll. If your business isn’t restricted to any specific paydays, then you decide what pay schedule is best for you and your employees.
Most workers prefer to be paid more frequently. Of course, the more often you pay your employees, the more you’ll spend on processing fees. A biweekly pay schedule offers an ideal balance for employees and employers, which is likely why it’s the most common pay frequency in the United States.
7. Which is Better: Direct Deposit or Written Checks?
Using direct deposit rather than physical checks reduces the impact that payroll has on your cash flow. You can’t control when your employees will cash checks, which can make it difficult to ensure that you have sufficient funds in your account.
With direct deposit, payments are automatically transferred into employees’ accounts. This makes it much easier to manage your finances because you only need to cover the cost of payroll on certain days of the month.
8. How Can I Process My Payroll More Efficiently?
Efficiency is everything when it comes to employee payroll processing. Here are three ways that you can make your payroll system more efficient.
Use Digital Timekeeping Solutions
Physical timesheets are highly inefficient and often lead to mistakes. By adopting a digital time tracking software, you can automatically track employee hours and attendance.
Invest in Payroll Software
The days of having to manually process payroll are long gone. Fortunately, you now have access to automated software that can perform repetitive and time-consuming tasks for you. Most payroll software can integrate with other operations to streamline your payroll system, which reduces errors and saves time.
Stay Up-To-Date with Regulatory Requirements
Being unaware of new tax regulations or updates puts you at risk of non-compliance. You should dedicate some time each month to check the regulations that affect your business and adjust your operations as necessary.
9. What If I Need More Help?
If you’re feeling overwhelmed, consider outsourcing your small business payroll processing to experts—like Powered by Centri. We can set you up with the best tools and processes to make sure that your payroll system is well established.
Why Outsource Payroll Processing Services?
Creating an orderly system for payroll processing can be complicated, but you don’t have to do it on your own. With Powered by Centri, you’ll get to work side-by-side with knowledgeable advisors who are committed to optimizing your human resources and payroll functions.
Alongside you, they’ll assess your current systems, determine where there’s room for improvement, and help implement new processes for increased effectiveness. But, their expertise isn’t just limited to the initial process creation. You can reach out for advisement whenever it’s needed.
Our detail-oriented experts stay informed on payroll requirements and regulatory changes so you don’t have to navigate it alone. They’ll help you overcome every hurdle and ensure that your business stays compliant with all federal, state, and local laws. Additionally, our automated software systems significantly reduce errors that can cause penalties.
Access to Advanced, Integrated Software
Powered by Centri offers the most advanced suite of integrated software solutions to streamline all aspects of the payroll process—from tracking hours and PTO to calculating pay and updating records. But we don’t just grant you access and leave you to figure it out. We’ll train you and your team so that everyone can get the most from the technology.
With support in place, there’s no need to spend hours upon hours crunching numbers, researching laws, and filing records. Your payroll is set up for success from the start to run efficiently. With all of the extra time, you can focus on what matters most—growing your business.