Easy Payroll Guide for Small Businesses

Estimated reading time: 3 mins

Managing payroll remains one of the biggest problem areas for small business owners. Already operating under a tight budget, it can seem impossible to hire someone exclusively to handle payroll. Additionally, few employees, often not more than 12, make it seem unnecessary to outsource the work and pay high fees. Most small business owners will confess that they decided to handle payroll themselves after considering available options.

You may have found yourself at a similar conclusion. Though managing payroll seems deceptively simple, there are dozens of details to account for in the process. Specific regulations come into place, such as wage laws enforced by the department of labor (DOL) and employment tax laws monitored by the Internal Revenue Service (IRS). 

While this may seem daunting, there are a few tips that will help you manage payroll effectively.

Invest in Payroll Software

A decade or so ago, it was common for small businesses to rely on manual payroll systems.  These are, however, prone to the errors that people make, are time-consuming, and cumbersome. Using this system requires that wages and deduction be calculated by hand. The downsides of a manual payroll system greatly outweigh its benefits. Opting for an automated payroll processing system is preferable. 

As noted by experts at CheckMark, payroll processing software makes it easy to manage all payroll processes and should help you save you time and money, and guarantee accuracy. More than that, it should ensure that you’re compliant with IRS requirements. When choosing automated payroll software, choose one that’s easy to use, affordable, and secure. 

Differentiate Contractors from Employees

One of the biggest challenges while setting up payroll is differentiating independent contractors from employees. Classifying workers as either employees or contractors, significantly impacts your bottom line. In the past year, multiple companies have fought against laws that sought to classify their workers as employees. Determining whether a worker is a contractor or an employee comes down to three questions:

  • Does the employer control work completion?
  • Does the employer provide tools for the job?
  • Is the work ongoing and inclusive of benefits?

Usually, answering yes to any of these questions means that the worker is classified as an employee. That will impact how Medicare, social security, and unemployment taxes are paid. Additionally, all employees are required to complete a Federal Income Tax Withholding Form W-4 and a 1-9 form as verification that they are permitted to work in the United States.

Record Filing

Good record-keeping is essential for an efficient payroll management system. You’ll need to track the total number of hours worked if you hire by the hour for starters. Additionally, for employees under salary, you need to track paid time off and holidays taken. Standard working hours for a full-time employee are 40 hours a week though this usually averages 35 or 37 hours.

Finally,  you’ll need to file records of current and former employees for a certain period. That is especially important if you have switched from one payroll management system to another. You’re required by law to retain most payroll records for a set time. The IRS, for instance, requires that you keep employment tax records for at least four years.

More Efficiency, Better Results

Keep in mind that to establish an effective payroll administration system, you need to have a clear company policy regarding payment and also determine how often payroll will be done. Managing payroll may seem like an uphill task even for seasoned accountants. However, you should be ready to handle your small business payroll yourself effectively with the tips listed above through proper tracking, processing, and record-keeping.


About the author /

Simon is a creative and passionate business leader dedicated to having fun in the pursuit of high performance and personal development. He is co-founder of Applied Change, a Business Change consultancy based in the UK. Simon is also an Ambassador for Gloucestershire business. Simon is an Associate Member of the Chartered Institute of Professional Development.

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