“Pay day” is generally a term that people love to hear – but maybe not if you are in the accounting department and especially not if you are manually running payroll. Employees are the backbone of any business and running an accurate payroll is key to keeping those employees happy. So, why do some small businesses risk miscalculations and mistakes by running it manually? Let’s take a moment and talk about small businesses and payroll.
Many small business owners run as lean as possible when they first launch. Keeping expenses down is important when you are still working on building your revenue stream. Plus, if you are a solopreneur, paying yourself may not seem that complicated. However, as your business grows and you get more employees, your payroll situation will become more complex.
Why do you need a payroll system?
Paying your employees is an incredibly important task, but it can be a tricky one as well. Let’s face it, as a business owner, you may be willing to work on your business purely for the joy of it, but you are likely the only one. To keep your business running smoothly, you need to be sure you are managing payroll properly. Not only do you need to make sure your employees are getting paid properly, but you also need to make sure state and federal tax agencies get paid the correct amount and on time. You also need to ensure federal deductions are being managed properly. Let’s dive deeper into two common deductions:
- Social Security– Did you know that social security deductions are dependent on wages? Social Security taxes are pulled through payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (in 2023). However, if you are self-employed the tax rate is 12.4 percent.
- Medicare – Everyone must pay Medicare tax and the employee tax rate for Medicare is 1.45%. The employer also pays Medicare tax at 1.45% as well. So, the total Medicare tax rate percentage is 9%, however only the employee portion of Medicare taxes is withheld from employee paychecks.
Sound like fun yet? Those are only two elements that need to be addressed in payroll. We haven’t even touched on health insurance, life insurance, or retirement plan deductions. What about overtime, time-off accrual, and holiday pay? The point is that there are many moving parts in managing payroll. If you are trying to manage payroll with a spreadsheet mistakes are bound to happen. In addition to being hugely time consuming, a simple miscalculation or a transposing of numbers can cause havoc. Mistakes result in unhappy employees, potential tax reporting issues, and lost time and money for the business. Have we convinced you that payroll systems are vital yet? Good.
Using Accounting Software for Payroll
If you already have accounting software, you likely already have access to payroll software. Just about all accounting software programs, like QuickBooks, have a payroll function that will assist in managing the calculations, deductions, and reporting. These programs will also assist with managing historical data and forecasting. If you have not invested in an accounting platform, payroll is yet another reason to consider it.
One note, if your financial information is not current in your accounting platform, you may run into snags. Another reason to keep your system as current as possible.
Should you consider contracting out payroll?
While accounting programs can be great for small businesses, you still need someone on your team to manage the data and tax submissions. As your company grows, you may want to consider working with a payroll company that will manage the most important parts of the payroll process if not all of it for you. A payroll company is a great option to consider when your business has complex issues such as multi-state tax reporting, multiple locations or even just a growing number of employees.
Payroll companies can manage:
- State withholding and taxes
- Federal taxes and deductions
- Quarterly reporting
- W2s for employees
added benefits of out-sourcing payroll:
- If there is a mistake (which can always happen) they are responsible for finding the issue and correcting it.
- You can direct in-house accounting staff to more strategic efforts.
- Many payroll companies also have a Human Resources branch that you can tap into if you need support in that area for employee issues.
How to find the right payroll company for your business
Finding the right payroll company for your business will take some effort. First, check in with your business network for recommendations. When you have a few options, schedule meetings with them and treat them as if you were interviewing a prospective employee – you want to make sure they understand your business and there is a good fit.
Questions to consider in deciding what company to go with:
- What services do you need, and can they provide it? Many businesses need support beyond basic payroll functions. For example, job costing (tracking revenue and costs for individual projects) is common in fields like construction. Does your industry have specific accounting needs that the payroll company should know about?
- How much of the payroll responsibility are you wanting them to take on? Many payroll companies have various levels of support, and you need to think about how much help you really need and how much you are willing to let them take on. Some business owners cannot hand over full responsibility fast enough while others need to take baby steps to feel comfortable.
- What does the process look like for your business with the payroll company? Your company will still need to provide data to the payroll company, so discuss what that process will look like. How will information be shared and how often?
Note: You will need to provide the payroll company with employee W4 and I9s to get them started. If it is the middle of the year payroll reports will be required as well.
Growing your business is an exciting process and it often requires you to adapt your processes to accommodate your growth. When it comes to payroll, consider updating your process to include payroll software and/or a payroll contractor. When you find the right vendor for your business, not only will you be able to direct internal resources to more strategic efforts, but you will also rest easier knowing you have experts handling the process for you.
If you need assistance with your payroll or accounting processes, contact us at 505-850-3908. We’d love to help you continue to grow your business.