Payroll for Small Business – 6 Things Everyone Should Know

Woman typing on computer surrounded by boxes in room.
By Mary Walsh | 09/12/2023 | 18 min read

Small business owners manage a wide range of responsibilities, often focusing the majority of their time and energy on organizational growth and revenue-producing tasks and projects. Along the way, in-house payroll processing can sometimes fall by the wayside. When payroll becomes disjointed or disorganized, it can lead to errors, penalties, employee retention issues, and ultimately detract time and energy from core business goals.

To return focus to organizational growth, ensure long-term compliance, and improve employee satisfaction, many organizations seek out payroll software or small business payroll solutions. Even with the awareness that in-house payroll is no longer sustainable, it can still be difficult to find a qualified provider that can help with compliance, recordkeeping, wage calculations, deductions, payroll taxes, employee classification, and other responsibilities.

Here, we’ll guide your organization through the six things everyone should know when preparing payroll for a small business, and which features to look for in a small business payroll solution.

Compliance & Recordkeeping

One of the primary reasons to consider shifting from an in-house manual approach to payroll is to automate (and receive expert support) to comply with a wide range of payroll, wage, and labor laws. Local, state, and federal laws vary greatly and change rapidly, sometimes within the same calendar year. Expert guidance and support with compliance concerns is especially important since regulations differ based on business size, industry, as well as the jurisdiction(s) where your small business and your employees and contractors reside and work.

Legally compliant payroll management includes keeping payroll records to fulfill all local, state, and federal legal requirements. In many cases, it’s necessary to retain employment tax records, wage determination records, and payroll records for up to 3-4 years, just to remain compliant with the Fair Labor Standards Act (FLSA) and IRS requirements. In the event of a lawsuit, audit, or liability claim, it’s essential to have digital copies of these documents stored, well-organized, and easily accessible for dissemination to agencies within requested time periods.

Recordkeeping best practices should equally extend to other employee documents and data, including benefits contributions and reimbursements, employee workday/workweek hour reports, weekly overtime earnings, pay dates, pay period dates, and much more.

Calculating Gross Wages

Software and expert support can also help your small business consistently and accurately calculate employee gross pay. Gross wages represent the total amount an employee is paid based on wages for hours worked, plus tips, bonuses, commissions or other forms of monetary compensation. Among hourly employees, you must multiply hourly rate by total hours worked per pay period to determine gross pay, while for salaried employees you must divide yearly salary by the number of annual pay periods. Of course, these calculations become more complicated as bonuses, tips, commissions, and other considerations impact the total amounts.

Next, we’ll discuss how to factor gross pay calculation against pretax deductions and payroll tax deductions completed on your employees’ behalf, which allows you to determine net pay.

Payroll Taxes & Deductions

For most small businesses, accurately and expediently making pretax and payroll tax deductions is the most demanding part of the payroll process, which is why more small businesses are seeking a qualified provider to streamline and simplify these important HR tasks. With the right software and professional support, all necessary deductions can be automatically deducted based on an employee’s W-4 and any other applicable factors.

Whether your organization completes deductions through an automated payroll platform or through a series of manual processes, the following sequential steps should occur:

  • Pretax deductions per employee/paycheck – This includes health insurance plans; 401(k) plans; other qualifying retirement plans; FSA or HSA contributions; and some life insurance plans.
  • Payroll tax deductions – This applies to most employees and includes deductions/payments for income taxes to the federal government and the state government in your jurisdiction (in some cases). Employee deductions must also be made for FICA taxes that are directed towards Social Security and Medicaid – a combined 7.65% tax.
  • Voluntary Deductions – Voluntary deductions taken from an employee’s gross pay may include Roth IRAs, garnishment, union dues, select life insurance policies, and some long-term disability insurance plans.
  • Determining Net Pay – The money remaining following all of these obligatory and voluntary deductions represents an employee’s net pay: what they will receive on payday.
  • Payments to the IRS and State – Small businesses and other employers must file and pay all calculated taxes deducted from their employees’ checks, usually on a quarterly basis to both the IRS and the state where their business operates. Late or inaccurate payments can lead to penalties or fines from multiple government entities – a risk that is majorly mitigated when you collaborate with a qualified payroll provider.

Payment Methods, Frequency, and Prioritizing Employee Satisfaction

As small businesses seek to remain competitive in the hiring market – and to ensure employee retention – more are revisiting their employee payment methods, pay frequency, and other payroll choices that impact employee satisfaction.

Many small businesses are now using direct deposit as a standard payment method due to its popularity among workers for its convenience and other benefits. A qualified payroll provider can help you easily institute direct deposit as your payment method, while retaining traditional options like paper checks or alternative methods like payroll debit cards. A payroll provider should also be able to generate an electronic pay stub for each payment (including an itemized set of deductions) to ensure accurate recordkeeping per employee.

It's equally important for small businesses to speak with their employees regarding their preferred pay frequency to gather a consensus and choose between weekly, bi-weekly, bi-monthly, and monthly pay. A number of additional factors may impact your business’ decision, including whether you have more salaried or hourly workers, as well as the payday regulations in your state. Our guide on pay periods and why they matter can help you make an informed decision for your workforce. Currently, biweekly pay is the most popular choice and preference among American workers, with 43.7% of businesses adopting this approach.

Employee Classification

When considering pay schedules and other tax implications, you will also need to factor employee classification into the equation. Employee classification can be more complicated than it appears at first glance. Whether it’s determining whether to complete a W-2 or a 1099 for an employee vs. independent contractor, or gauging exempt vs. nonexempt classification to determine overtime eligibility, employee classification is an essential process with major implications. If your employees are misclassified – unintentionally or otherwise – it could lead to penalties, fines, as well as payment(s) due for unfiled employment taxes.

Choosing a Qualified Payroll Provider

With these extensive payroll-related challenges and concerns in mind, many small businesses choose to switch from a manual, in-house approach towards an automated payroll solution. Since it can be difficult to determine which key offerings to look for in a payroll provider, we’ll outline the essentials to keep in mind.

Any payroll provider should be able to noticeably streamline and simplify your small business’ payroll process. In the best-case scenario, this includes an equal combination of automated digital tools and personalized customer support. Software alone only goes so far without dedicated guidance from experts with decades of experience in payroll, compliance, and HCM.

As part of streamlining your payroll process, a qualified provider should offer a digital platform that includes a self-service portal for your employees with 24-7 mobile access. The platform itself should be easy-to-use and intuitive for you and your employees, and should easily integrate with other HCM processes that are interconnected with payroll, including time & attendance; scheduling; workforce management; benefits administration; onboarding, and more.

Streamline Payroll, Compliance, and Workforce Management

Struggling with payroll complexities using an in-house approach? We offer specialized payroll solutions designed to fit the unique needs of your small business. With access to your own dedicated Payroll Guide and digital HCM solutions that can integrate payroll, scheduling, workforce management, time & attendance, and more, we offer comprehensive tools and support to let you return focus to core business tasks. Click here for a free consultation, and let us simplify your payroll process today.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.