5 Payroll Basics Every Small Business Owner Must Know

Your employees are a vital part of your company. Without them, you wouldn’t be able to do a fraction of what you do. In return, though, they expect to be paid – and paid on time and correctly. 

For many small businesses, payroll is complex and time-consuming. It’s not a matter of simply calculating what you owe by multiplying the hours worked by their pay rate. There’s paperwork, tax laws, labor regulations, and other factors to consider, which all add up to hours of work. The easiest way to ensure your employees are paid correctly is to use a PEO for payroll, as they have the skills and systems in place to get the task done correctly and without headaches, but even if you do outsource the task, there are some important basics you need to understand to keep everything running smoothly and stay out of hot water with your employees and regulators. 

1. Employee Classifications

Employers have three options for classifying employees that influence their eligibility for overtime pay, medical leave, unemployment insurance, and more: Exempt, non-exempt, and contractor. Failing to correctly classify your employees has serious consequences, as it affects both their eligibility for certain benefits and their tax liability. It may be tempting to classify employees as contractors to avoid much of the paperwork involved with payroll and to save money on unemployment insurance, etc., but there are specific rules that govern a contractor classification, and not adhering to them is costly. Therefore, you need to understand the criteria for each type of employee, and correctly classify all of your workers to stay within the boundaries of the law. 

2. Wage Laws

Paying your employees isn’t only about determining an hourly rate or a salary. There are different types of wages to account for, such as vacation, sick, or overtime pay, as well as commissions and bonuses. There are also varying federal and state laws regarding minimum wage, and rules about working hours and breaks that need to be followed. As the employer, it’s your responsibility to understand exactly how much your employers are to be paid, and correctly calculate their earnings. If you don’t, you could face fines and penalties, and face redoing past tax returns.

3. Paperwork Rules 

Hiring employees comes with a lot of paperwork, and it’s important you file the correct documents and keep employee files up to date. The federal government has become stricter about new hire reporting and conforming employee eligibility to work in the U.S., so payroll needs to be meticulous about collecting the right paperwork and submitting it in a timely manner. This includes I-9 forms, and tax forms like the W-4 or W-9. 

4. Taxes and Deductions

For exempt and non-exempt employees, you’re responsible for withholding payroll taxes from your workers’ earnings and submitting them to the state and federal government on a quarterly basis. However, taxes (which include federal, state, and local taxes) aren’t the only deductions you need to manage. You may also need to make deductions for disability insurance and wage garnishments (such as for child support or taxes owed by the employee), as well as deductions for health insurance, retirement funds, or other benefits. Correctly calculating these deductions is important (for instance, contributions to retirement plans are made pre-tax) is important, to ensure your employees are paid the proper amount. 

5. Record Keeping

Finally, keeping meticulous and detailed records is a key aspect of payroll management. Employers must keep records of employee contracts, time sheets, and deductions in accordance with the Fair Labor Standards Act. Failing to do so can not only lead to penalties from the Department of Labor, but cause problems if there are questions about your payroll management or how much your employees have been paid. 

Running payroll is one of the most important jobs you have as a business owner, but it’s also potentially one of the most complex. If you don’t understand all of the intricacies, or have questions about the best way to handle paying your employees, it’s best to ask for help or outsource the process. Paying your employees is too important to leave to chance, and mistakes will be costly to your business’s bottom line and reputation. 

Ryan Kh