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Updated: December 19, 2022
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Effectively administering payroll can be the difference between retaining and losing key employees. Just a few payroll errors would lead 49 percent of employees to start job hunting. Plus, errors can be costly: about 28 percent of small and mid-sized businesses have gotten a notice or been audited by the IRS, thanks to payroll mistakes.
As you focus on this crucial part of running a business, here are a few basics to help get payroll right.
Getting your legal and procedural payroll ducks in a row is the first step toward creating an effective payroll process. In order to successfully complete your set up, you must do the following:
There are pros and cons to each pay schedule, so it’s crucial to consider the unique needs of your business, along with your payroll capabilities, and applicable Department of Labor regulations when choosing yours.
With your paperwork in order and your pay period determined, the next stage in the payroll process is determining your employees’ gross and net pay — two very important numbers:
Deductions and withholdings are what get you from gross pay to net pay. They come in several forms:
It’s important to note that the federal government collects Social Security and Medicare taxes from both employees and employers, so you will need to calculate and set aside both your employees’ contribution amount and the amount you owe as the employer. As an employer, you’ll also be on the hook for unemployment taxes.
Once you have completed calculations for gross and net payments to your employees, you’ll be ready to pay your team. Your payments can take multiple forms, depending on your business’s capabilities and your employees’ needs.
Once you have calculated your employees’ deductions and set aside the amount owed for taxes, the next step is making your tax payments and filings. All the income tax withholdings described above generally must be submitted on a monthly or semi-weekly basis to the appropriate tax authorities. In addition, most businesses are required to file payroll-related tax forms quarterly and at the end of the year.
It’s worth the time to create a calendar of due dates so you don’t miss any.
Specifically, the IRS requires:
Most states require quarterly reports on unemployment and workers’ compensation tax liabilities. You’ll also need to give each employee a W-2 form at the end of the year so they can file their own taxes, and then use Form W-3 to submit all those W-2s via paper filings to the IRS.
Getting payroll right is central to running your business smoothly, so determining the best approach to taking care of your payroll duties is essential. Each option has pros and cons you will need to weigh:
Now that you know everything that goes into running payroll, you should be able to start assessing your options. To avoid mistakes or paying employees late, it’s important to have a routine you can stick to. So spend some time thinking about the pros and cons of each approach — and how much you can realistically take on — before making your decision.
This article was originally written by OnPay, a payroll company we partner with to help you get more of your to-dos done.