How to do payroll and avoid mistakes
Editor’s note: This post was originally published in September of 2017 and has been updated for accuracy.
As seen on:
Managing payroll can be one of the most time consuming and error-prone challenges facing business owners today. With labor regulations and litigations on the rise, payroll errors can also be costly to the business. After all, over 40 percent of businesses are fined over $850 annually for payroll mistakes. Pair that with employee churn due to payroll errors and costs can skyrocket.
How to do payroll
It’s important to have a plan for payroll when onboarding employees. Lucky for you, payroll doesn’t have to be difficult. All it takes is a little bit of preparation and with the right software, you can easily automate the payroll process.
Below are the three different ways to do payroll:
Manually do payroll
After you hire your employees, the next step is to add them to your business’ payroll system. The least expensive way to go about this is to do payroll manually. If you’re tax savvy, this DIY approach may also come naturally. However, given the multitude of human errors that can happen, make sure you are comfortable with everything you need to do before diving in.
Follow the following steps to manually do your payroll:
Gather payroll information
Have your employees fill out the correct forms
Manually do calculations
- Doing payroll manually can take up a lot of time. You have to do all the calculations, distribute wages, and taxes.
- Check out this article for tips on calculating employee’s net pay.
- It is your responsibility for each employee to be paid properly and on time. Distribute your employees pay with your preferred method such as checks, direct deposit, or cash.
- Another part of your payroll responsibilities includes collecting, remitting, and filing payroll taxes at the end of each pay period. These taxes include federal income tax, federal and state unemployment taxes, and social security and Medicare taxes.
- Read this article for more tips on getting your small business ready for tax season.
File tax forms
- Lastly, make sure to send in your employer federal tax return and any other tax forms due at the end of the quarter. At the end of each year, be sure to have your W-2s ready as well.
Hire an accountant or bookkeeper
If the above method seems too daunting, then hiring an accountant or bookkeeper to take care of the financial aspects of your business is another alternative. An accountant or bookkeeper can also provide reliable resources and advice as your business grows. And who knows the business better than an accountant? That is just one benefit of hiring an accountant or bookkeeper. Below are some of the top benefits of hiring an accountant or bookkeeper:
- Spend minimal time on payroll
- Fewer data entry errors
- Avoids late fees
- Enhanced security
- Compliance with government regulations
- No more overlooked tax write-offs
- Gives employers time to focus on other business duties
- Provides financial predictions to help you make more informed decisions
- Help you reach your business goals
However, these professionals come with a cost. In fact, this is the most expensive method. Before you jump into signing a contract with an accountant or bookkeeper, make sure you do your research and, most importantly, make sure you have the budget for this method.
Invest in Payroll Software
This is probably the most popular method for how to do payroll. It’s more expensive than doing payroll yourself but significantly less expensive than hiring an accountant or bookkeeper. With payroll software, you remain in constant control during the entire payroll process. Companies like Gusto, Square, Xero, and ADP are popular payroll services that can take care of the financial aspects of your business. For the complete list of Deputy’s top pick for payroll providers, check out this article.
When considering what to look for in a payroll provider, companies should find one that can best fit their business needs and goals. The following list addresses some important features to consider when looking for a payroll software:
Tax filing feature
- Correctly calculates what your employees are getting paid and avoids any human errors. Interested to see how much money your organization can save using payroll software? Download our free ROI calculator below:
Integration with other systems
Direct Deposit feature
- This is a great tool for distributing employee pay. Most employees expect their employers to offer this feature since physical checks and a trip to the bank are no longer required.
- Receive notifications of any flagged issues in the payroll system. It should also send notifications when employees are approaching overtime.
Employee Self-Serve Portal
- Employees are able to view and manage their personal payroll data online. This streamlines the data keeping process, as it eliminates the need for back-and-forth communication between employees and their employers.
So, what can businesses do to avoid making mistakes on their payroll?
- Onboard new employees correctly and keep them updated
- Keep Uncle Sam happy
- Eliminate human error
- Empower your employees
- Increased security
1. Onboard New Employees Correctly and Keep Them Updated
From the moment a new employee is hired, take the time to correctly document all employee information to prevent payroll issues in the future. Create verification processes for both employees and managers to confirm that new employees have correctly entered their name, social security number, bank account deposit number, deductions for benefits and 401(k), and have accurately filled out their information on their tax forms.
An employee self-onboarding software can help you complete paperwork electronically before the new hire’s start date and help you include e-signatures to ensure the employee has verified the information.
Make sure your current employees are also following a tight process for updating their information such as changes in their address, marital status, and tax deductions. A best practice is to set up quarterly reminders for all employees to confirm that nothing has changed in their employee information. Be sure to also keep your employee job descriptions updated as well to protect your business from misclassifying your workers.
2. Keep Uncle Sam Happy
To prevent the most frequent and costly mistake — payroll taxes — take the time to stay abreast on the latest federal, state, and local tax laws. This includes making sure your business is correctly reporting employee income tax withholdings, unemployment taxes, and classifying employees correctly (e.g. exempt vs. nonexempt, employee vs. independent contractors) to prevent wage and hour lawsuits. Make certain you’re also paying your payroll taxes on time (every payday) to avoid heavy penalties and interest charges.
Additionally, to protect your business from a potential lawsuit of back pay claims of unpaid hours worked, properly track and document your employees’ time worked for a minimum of 3 years of payroll. Document all hourly wages, daily and weekly hours worked total earnings, and overtime pay. Automated time tracking tools can help to accurately keep track of employee hours worked while formally documenting it for potential future evidence.
Consider also outsourcing to an accounting or a payroll company to ensure tax payments are made on time and the complexities of the local, state and federal mandates are properly managed so your business can stay compliant.
3. Eliminate Human Error
There are many common human errors business owners can make when managing payroll. These can include giving an employee a manual check (e.g. as a bonus or award) and forgetting to record it on payroll, incorrectly calculating hours worked thus underpaying or overpaying your employees, miscalculating PTO, and the many tax reporting mistakes listed in tip #2.
Processing payroll manually increases errors because you’re pulling info from many different sources such as Excel spreadsheet tabs, tax info, timesheets, and deposit info. Poor record keeping and organization can increase the likelihood of mistakes when doing payroll, but it’s also incredibly time-consuming. Nearly a quarter of all small business owners spend at least six hours a month dealing with payroll.
Having a time tracking software that’s integrated into any payroll management software eliminates the human aspect of payroll management and instead uses a fully automated system for accurate payroll and proper documentation to address compliance. As an added bonus, these tools significantly reduce the time spent managing employee schedules, timesheets and payroll from hours to minutes per month.
4. Empower Your Employees
Preventing payroll mistakes (and potential future litigations) can be as simple as giving your employees the tools and processes needed to communicate with you and your managers about any payroll inaccuracies.
If your employees catch payroll discrepancies, have a formal process in place so they can report these issues and more importantly, you can quickly resolve the discrepancy before they become bigger problems (i.e. litigation). Use an easy communication tool or payroll discrepancy form where they can notify you or your managers on any timesheet or payroll errors.
Time and attendance tools can also allow your employees to review and verify their hours worked when they clock in and out which provides a layer of attestation protection for the business.
5. Increase Security
Managing payroll manually or in-house renders your business vulnerable to payroll fraud such as identity theft and misappropriation of funds. Fraudsters from an outside source can also steal employee tax and salary data if the business doesn’t have proper safeguards in place.
Using cloud-based solutions for time tracking integrated with payroll services can mitigate security risks, as these providers have advanced security measures in places such as two-factor authentication, data encryption, and security certifications to ensure your data is properly stored and protected. Additionally, most payroll providers have built-in security features that can alert your business of payroll fraud.
Here at Deputy, we put our customers and partners first. Our mission is to help improve the lives of employers and employees, using technology to transform operations and help businesses thrive.
Increasingly, organizations are moving away from manual entry of data and manually manipulating spreadsheets towards a more efficient cloud-based software approach. By simplifying scheduling, timesheets, tasks, and workplace communication, Deputy can transform business operations. Give Deputy a try by signing up below for a free 30-day trial.