How to Do Payroll: A Primer for Small Businesses
By Eddy Team — October 14, 2024
Imagine it's payday, and instead of celebrating, you find yourself drowning in a sea of spreadsheets, trying to make sense of endless calculations, tax codes, and employee records. Sound familiar? You’re not alone. Payroll can feel like a never-ending puzzle, especially for small business owners juggling a million tasks at once. But here's the good news: it doesn't have to be that way. With the right payroll software and a few savvy strategies, you can learn how to do payroll for your small business without the headache, get it done faster, and make sure everyone gets paid correctly — every single time.
In this guide, we'll walk you through everything you need to know to handle payroll like a pro, from understanding the basics to avoiding common mistakes and finding the simplest ways to keep things running smoothly. So, let's dive in and turn payroll from a stressful chore into a manageable task that supports your business's growth and keeps your team happy!
Payroll Basics: Key Terms and How It Works
Payroll is all about making sure your team gets paid for the work they do. It’s a key part of running any business because it keeps everything running smoothly — employees get their paychecks on time, and you stay on top of tax rules and labor laws. To get payroll right, here are some basics you should know.
What is Payroll?
At its core, payroll refers to the total amount an organization pays to its employees over a set period, which could be paid weekly, bi-weekly, semi-monthly, or monthly. It includes everything from calculating gross wages and tax withholdings to making payments and maintaining records of all transactions. The goal of payroll is to compensate employees fairly while ensuring compliance with federal, state, and local regulations.
Key Payroll Terms to Know
Payroll can seem complex and overwhelming at first, but getting familiar with a few key terms can make it much easier to manage. To help you get started, here are some of the most important terms to understand for handling payroll effectively:
- Gross Wages: The total pay an employee earns before any deductions (like taxes or benefits).
- Net Wages: The amount an employee takes home after all deductions are applied (often called "take-home pay").
- Deductions: Amounts taken out of gross wages for taxes, retirement contributions, health insurance, etc.
- Withholdings: Required amounts taken from an employee's paycheck to cover taxes (like federal and state income taxes, Social Security, and Medicare).
- Employee Classification: Determines if an employee is exempt (salaried, not eligible for overtime) or non-exempt (hourly, eligible for overtime pay) under the Fair Labor Standards Act (FLSA).
- Payroll Taxes: Taxes employers must withhold from employees' wages and pay on their behalf, such as Social Security, Medicare, and unemployment taxes.
These are just a few of the basic terms to get you started. For a deeper dive into payroll terminology, check out our article of 99 payroll terms you should know.
How Does Payroll Work?
- Calculate Gross Wages: Start by calculating the gross wages for each employee based on their salary or the number of hours worked.
- Apply Deductions and Withholdings: Deduct taxes, retirement contributions, health insurance premiums, and other withholdings from the gross wages.
- Distribute Net Pay: After deductions, pay the remaining amount (net pay) to the employees, either through direct deposit or paper checks.
- File and Pay Taxes: Make sure you’re filing payroll taxes on time with the right authorities, and double-check all the withholdings are accurate.
- Maintain Records: Keep detailed payroll records, including timesheets, pay stubs, tax filings, and employee classifications, to comply with regulatory requirements and prepare for potential audits.
How To Set Up Payroll For Small Businesses
Handling payroll for a small business involves several steps to ensure that your employees are paid correctly and on time while staying compliant with tax laws and labor regulations. Here's a simple breakdown to help you get started:
1. Obtain an Employer Identification Number (EIN)
First, you’ll need to get an Employer Identification Number (EIN) from the IRS. This number is like a social security number for your business and is required for reporting taxes and other important documents. You can apply for an EIN on the IRS website.
2. Gather Employee Information
Collect all the necessary information from your employees to run payroll. This includes:
- Form W-4: Determines federal income tax withholdings based on employee details.
- Form I-9: Verifies employee eligibility to work in the U.S.
- State withholding forms, if applicable.
Payroll software such as Eddy can simplify this step by providing digital versions of these forms, automatically collecting the required information from employees, and securely storing it for easy access and compliance.
Ensure that all forms are filled out correctly to avoid errors in tax withholdings or payroll calculations.
3. Choose a Payroll Schedule
Decide how often you’ll pay your employees. Common pay period options include weekly, bi-weekly, semi-monthly, or monthly. Be sure to check state laws, as they may have specific requirements for pay frequency.
4. Calculate Gross Pay
For hourly employees, multiply the number of hours worked by their hourly wage. For salaried employees, divide their annual salary by the number of pay periods in the year. Don’t forget to account for any overtime, bonuses, or commissions.
5. Determine Deductions and Withholdings
Subtract all necessary deductions from the gross pay, including:
- Federal Income Tax: Use the IRS tax tables to calculate based on the employee’s W-4 form.
- State and Local Taxes: These vary depending on where your business operates.
- FICA Taxes: Includes Social Security and Medicare taxes. Both you and your employees contribute to these.
- Pre-Tax Deductions: Such as retirement plan contributions or health insurance premiums.
For more details on specific deductions and withholdings, refer to the Payroll Liabilities Guide.
6. Calculate Net Pay
Once you’ve determined the gross pay and applied all deductions, you’ll arrive at the net pay — the amount your employees take home. This is what you’ll pay them, either by direct deposit or check.
7. Pay Your Employees
Distribute the net pay to your employees on the scheduled payday. If possible, use direct deposit to streamline the process and reduce the chances of errors or delays.
8. File and Pay Payroll Taxes
Regularly file payroll taxes with the federal, state, and local tax authorities. The main forms you’ll need are:
- Form 941: Quarterly federal tax return for income tax, Social Security, and Medicare taxes.
- Form 940: Annual federal unemployment (FUTA) tax return.
Be sure to stay on top of tax deadlines to avoid penalties.
9. Keep Accurate Records
Maintain detailed records of all payroll transactions, including timesheets, pay stubs, tax filings, and employee information. This is crucial for tax compliance, audits, and resolving any discrepancies that may arise.
10. Consider Using Payroll Software
Managing payroll manually is a bad idea most of the time. It can be time-consuming and prone to errors. Consider using payroll software to automate calculations, track deductions, file taxes, and keep records. For more about simplifying payroll with automation, check out this article on Automatic Payroll.
Common Payroll Mistakes and How to Avoid Them
Payroll is one of the most critical functions of any business, and even small mistakes can lead to significant consequences, such as financial penalties, employee dissatisfaction, and compliance issues. To help you avoid these pitfalls, make sure to check out our Compliance Checklist for a helpful guide to staying on the right side of the law. Below are some common payroll mistakes and practical tips to avoid them:
1. Misclassifying Employees
Getting employees mixed up as contractors or misclassifying them can end up costing you big time in fines and back wages. For example, if you treat an employee as an independent contractor but the IRS or the Department of Labor (DOL) determines they are an employee, you could be responsible for unpaid taxes and penalties.
How to Avoid It:
- Understand the difference between employees and independent contractors. Employees are generally subject to company policies, work schedules, and receive benefits, while contractors operate independently.
- Familiarize yourself with the Fair Labor Standards Act (FLSA) to determine exempt and non-exempt status.
- Review the IRS guidelines on employee classification or consider consulting a labor attorney for complex cases.
2. Inaccurate or Late Payroll Tax Payments
Failing to withhold the correct amount of payroll taxes or missing deadlines can result in penalties from the IRS. The IRS charges a failure-to-deposit penalty of up to 15% for late payments, plus interest on the outstanding amount.
How to Avoid It:
- Mark all tax filing deadlines on a calendar or use automated reminders.
- Use payroll software to calculate and withhold the correct amount of taxes and make timely deposits.
- Regularly review IRS guidelines and state tax requirements to stay current with any changes.
3. Failing to Maintain Accurate Records
Maintaining incomplete or inaccurate payroll records can lead to compliance issues, especially during an audit. According to the Fair Labor Standards Act (FLSA), employers are required to keep payroll records for 3 years and time cards or wage tables for 2 years.
How to Avoid It:
- Implement a robust record-keeping system that securely stores employee data, timesheets, pay stubs, and tax forms.
- Regularly audit your payroll records to ensure accuracy and completeness.
- Consider using digital tools or payroll software that automatically tracks and stores this information to maintain compliance.
4. Incorrect Overtime Calculations
Miscalculating overtime pay for non-exempt employees can result in underpayment, employee disputes, and potential legal action. The FLSA mandates that non-exempt employees must receive 1.5 times their regular pay rate for any hours worked over 40 in a workweek.
How to Avoid It:
- Familiarize yourself with federal and state overtime laws, as they may have different requirements.
- Ensure you correctly classify employees as exempt or non-exempt.
- Use payroll software to automate overtime calculations based on employees' work hours and pay rates.
5. Neglecting to Account for Changes in Payroll Laws
Payroll laws and regulations can change frequently at both the federal and state levels. Failure to comply with new laws or regulations can lead to fines and other legal complications.
How to Avoid It:
- Stay updated on payroll law changes by subscribing to relevant newsletters, joining professional organizations, or regularly checking government websites.
- Think about teaming up with a payroll service that keeps an eye on legal changes and makes sure you're in the clear.
- Train your payroll team regularly on new laws and regulations that may affect your payroll processes.
7. Forgetting to Factor in Employee Benefits and Deductions
Incorrectly calculating deductions for employee benefits such as health insurance, retirement contributions, or voluntary deductions can cause payroll errors and employee dissatisfaction.
How to Avoid It:
- Review your benefits plans and ensure that payroll deductions match what is outlined in employee agreements.
- Use payroll software to automate benefit deductions and keep track of changes in employee benefits.
- Use payroll software that integrates with your benefits providers to automatically sync employee benefit changes and deductions, reducing manual work and minimizing the risk of errors.
8. Switching Payroll Providers Without Proper Planning
Changing payroll providers can be a complicated process that leads to errors if not managed properly, such as duplicated payments, missed deductions, or data loss.
How to Avoid It:
- Plan the switch carefully by gathering all necessary data, communicating with employees, and setting a timeline.
By avoiding these common payroll mistakes, you can ensure smooth payroll operations, maintain compliance, and keep your employees happy and satisfied. Taking the time to implement best practices and use the right tools will help you avoid costly errors in the long run.
Employee Communication Tips
Clear and transparent communication about payroll is key to maintaining trust and understanding within your team. Here are five essential tips to keep your employees informed and engaged:
1. Provide Clear and Detailed Pay Stubs
Make sure every employee receives a pay stub that clearly breaks down their earnings, taxes, deductions, and net pay. Include brief explanations for any new or unusual deductions to reduce confusion. This transparency helps employees understand their pay and builds trust.
2. Be Proactive About Changes
Whenever there are changes to payroll, such as tax rate updates or benefits adjustments, communicate them in advance using multiple channels like emails, meetings, or employee portals. Proactive communication gives employees time to understand and prepare for changes.
3. Encourage Questions and Open Dialogue
Foster an environment where employees feel comfortable asking questions about their pay. Let them know who they can contact with payroll concerns, and ensure that inquiries are addressed promptly and clearly. Open dialogue prevents misunderstandings and shows that you value their concerns.
4. Use Simple, Accessible Language
Avoid payroll jargon or technical terms that might confuse employees. Use plain language — like "take-home pay" instead of "net wages" — to make payroll information easy to understand. This approach reduces confusion and makes communication more effective.
5. Leverage Technology for Easy Access
Utilize digital tools such as HR software or employee portals to give employees easy access to their payroll information, including pay stubs, deductions, and tax documents. This convenience empowers employees to find answers on their own, saving time for both them and your HR team.
Options to Simplify Payroll for Small Businesses
Managing payroll can be a time-consuming and complex task for small businesses. However, there are several strategies and tools available to help simplify the process and reduce the chances of errors. Here are some small business payroll options to make payroll easier and more efficient:
1. Use Payroll Software
Investing in reliable payroll software is one of the most effective ways to simplify payroll. Payroll software automates many tasks, such as calculating wages, taxes, and deductions, generating pay stubs, and keeping track of tax filing deadlines. It can significantly reduce the time you spend on payroll processing each month and minimize the risk of manual errors.
Benefits of Using Payroll Software:
- Automated Calculations: Software automatically handles tax calculations, overtime pay, and deductions, reducing the risk of mistakes.
- Time-Saving: Automates repetitive tasks like data entry, allowing you to focus on more strategic areas of your business.
- Compliance Support: Keeps you up-to-date with the latest federal, state, and local tax regulations, ensuring you stay compliant.
- Integration: Some payroll software integrates seamlessly with time-tracking systems, HR software, and benefits platforms, making the entire payroll process even more streamlined.
2. Automate Time Tracking
Accurate time tracking is crucial for calculating payroll correctly, especially for hourly employees. Manual time tracking methods like paper timesheets or spreadsheets can lead to errors and inconsistencies. Switching to automated time-tracking tools that integrate with your payroll software can help ensure accurate and real-time data.
How Automation Helps:
- Reduces Errors: Automatically captures employee hours, reducing the chance of human errors.
- Improves Efficiency: Simplifies the process of collecting and verifying hours worked, saving time for both employees and managers.
- Ensures Compliance: Keeps a precise record of hours worked to comply with labor laws and overtime requirements.
3. Opt for Direct Deposit
Direct deposit is an efficient and secure way to pay your employees. It eliminates the need for paper checks, reduces the risk of lost or stolen checks, and ensures that employees receive their pay on time, regardless of their location.
Advantages of Direct Deposit:
- Faster Payments: Employees get paid more quickly, and there are no delays waiting for checks to clear.
- Reduced Costs: Saves money on printing checks and postage.
- Convenience: Payroll funds are transferred directly into employees' bank accounts, reducing administrative work and providing employees with immediate access to their earnings.
4. Integrate Payroll with Your HR and Benefits Systems
Integrating your payroll system with your HR and benefits systems can save time and reduce errors by ensuring all data is consistent and up-to-date across platforms. This integration enables you to manage everything from employee onboarding and benefits enrollment to payroll and taxes in one place.
Benefits of Integration:
- Streamlined Processes: Automatically updates changes in employee information, such as new hires or benefit adjustments, across all systems.
- Improved Accuracy: Reduces the likelihood of errors due to manual data entry or discrepancies between systems.
- Comprehensive Reporting: Provides a unified view of payroll, HR, and benefits data, making it easier to generate reports and make data-driven decisions.
For more details on how integration can simplify payroll, visit Payroll Analytics.
5. Schedule Regular Payroll Audits
Conducting regular payroll audits can help you identify errors, discrepancies, or potential compliance issues before they become significant problems. Audits involve reviewing payroll records, tax filings, and employee classifications to ensure everything is accurate and up to date.
Why Regular Audits Matter:
- Ensures Compliance: Helps identify and correct any compliance issues before they result in fines or penalties.
- Builds Trust: Demonstrates to employees that payroll is handled accurately, enhancing trust and satisfaction.
- Improves Processes: Identifies opportunities to streamline processes or implement better practices.
6. Keep Up with Payroll Law Changes
Payroll laws and regulations are constantly changing. Keeping up with these changes is essential to avoid fines, penalties, and compliance issues.
How to Stay Updated:
- Subscribe to Updates: Follow industry news, IRS updates, and state tax websites to stay informed.
- Join Professional Networks: Consider joining payroll or HR associations to stay connected with peers and learn from industry experts.
- Use Payroll Software: Most modern payroll software is automatically updated to reflect the latest laws and regulations, ensuring compliance.
How Eddy Makes Payroll Easier
Ever wish payroll could be as easy as clicking a button? With Eddy, it can be. Here’s how Eddy takes the stress out of payroll management:
Save Time Every Pay Period
Tired of spending hours on payroll? Eddy automates everything from wage calculations to tax filings, turning hours of work into just minutes. For example, Bill at Networking Solutions saved 2-3 hours each week just by switching to Eddy. "It's been a huge optimization for us," he says. "Now I can focus on more important things." Amy from RevRoad also shares, "Eddy saves me a lot of time because everything is in one place. It probably saves me 40% of my time."
Case Study
Learn how RevRoad found tools to streamline their hiring, onboarding, time tracking, PTO, payroll and more.
Case Study
Learn how RevRoad found tools to streamline their hiring, onboarding, time tracking, PTO, payroll and more.
Stay Compliant Without the Headache
Never worry about tax laws again. Eddy automatically updates its software to reflect the latest regulations, so you’re always in compliance and avoiding penalties. Bill from Networking Solutions mentions the peace of mind that comes with knowing Eddy's team handles all the tricky parts of tax filings and compliance. John from Mangrum Enterprises agrees, stating, "Eddy has made us much more compliant, and now I don’t worry about missing any details."
Empower Your Employees
With Eddy, employees can access their pay stubs, tax documents, and benefits information online anytime, anywhere. Less hassle for them, and less work for you! Amy from RevRoad notes, "The team has loved it… everything is in one place, and it's so easy to use." John from Mangrum Enterprises adds, “Eddy helps me track everything, creating a good work environment that I enjoy."
Easy Onboarding and Management
From hiring to retirement, Eddy streamlines every HR task, allowing new hires to get started fast and employees to manage their profiles without needing your constant help. Amy says, "Onboarding with Eddy is just a click of a button — everything new hires need is ready to go the day they start." John from Mangrum Enterprises echoes this, stating, "Eddy has automated our onboarding process, making it much faster and more efficient."
Support You Can Count On
Need help? Eddy’s customer support is always there to ensure everything runs smoothly. Bill from Networking Solutions appreciated the "white glove" service provided during the transition to Eddy, which made the change "simple and painless." Amy also praises Eddy's team, stating, “The Eddy team is on it, and they get it taken care of. It’s just a great support system.”
Wondering, how to set up payroll for your small business? Request a free demo today and see how Eddy can simplify your payroll!
Eddy's HR Newsletter
Sign up for our email newsletter for helpful HR advice and ideas.
How to Do Payroll: A Primer for Small Businesses
By Eddy Team — October 14, 2024
Imagine it's payday, and instead of celebrating, you find yourself drowning in a sea of spreadsheets, trying to make sense of endless calculations, tax codes, and employee records. Sound familiar? You’re not alone. Payroll can feel like a never-ending puzzle, especially for small business owners juggling a million tasks at once. But here's the good news: it doesn't have to be that way. With the right payroll software and a few savvy strategies, you can learn how to do payroll for your small business without the headache, get it done faster, and make sure everyone gets paid correctly — every single time.
In this guide, we'll walk you through everything you need to know to handle payroll like a pro, from understanding the basics to avoiding common mistakes and finding the simplest ways to keep things running smoothly. So, let's dive in and turn payroll from a stressful chore into a manageable task that supports your business's growth and keeps your team happy!
Payroll Basics: Key Terms and How It Works
Payroll is all about making sure your team gets paid for the work they do. It’s a key part of running any business because it keeps everything running smoothly — employees get their paychecks on time, and you stay on top of tax rules and labor laws. To get payroll right, here are some basics you should know.
What is Payroll?
At its core, payroll refers to the total amount an organization pays to its employees over a set period, which could be paid weekly, bi-weekly, semi-monthly, or monthly. It includes everything from calculating gross wages and tax withholdings to making payments and maintaining records of all transactions. The goal of payroll is to compensate employees fairly while ensuring compliance with federal, state, and local regulations.
Key Payroll Terms to Know
Payroll can seem complex and overwhelming at first, but getting familiar with a few key terms can make it much easier to manage. To help you get started, here are some of the most important terms to understand for handling payroll effectively:
- Gross Wages: The total pay an employee earns before any deductions (like taxes or benefits).
- Net Wages: The amount an employee takes home after all deductions are applied (often called "take-home pay").
- Deductions: Amounts taken out of gross wages for taxes, retirement contributions, health insurance, etc.
- Withholdings: Required amounts taken from an employee's paycheck to cover taxes (like federal and state income taxes, Social Security, and Medicare).
- Employee Classification: Determines if an employee is exempt (salaried, not eligible for overtime) or non-exempt (hourly, eligible for overtime pay) under the Fair Labor Standards Act (FLSA).
- Payroll Taxes: Taxes employers must withhold from employees' wages and pay on their behalf, such as Social Security, Medicare, and unemployment taxes.
These are just a few of the basic terms to get you started. For a deeper dive into payroll terminology, check out our article of 99 payroll terms you should know.
How Does Payroll Work?
- Calculate Gross Wages: Start by calculating the gross wages for each employee based on their salary or the number of hours worked.
- Apply Deductions and Withholdings: Deduct taxes, retirement contributions, health insurance premiums, and other withholdings from the gross wages.
- Distribute Net Pay: After deductions, pay the remaining amount (net pay) to the employees, either through direct deposit or paper checks.
- File and Pay Taxes: Make sure you’re filing payroll taxes on time with the right authorities, and double-check all the withholdings are accurate.
- Maintain Records: Keep detailed payroll records, including timesheets, pay stubs, tax filings, and employee classifications, to comply with regulatory requirements and prepare for potential audits.
How To Set Up Payroll For Small Businesses
Handling payroll for a small business involves several steps to ensure that your employees are paid correctly and on time while staying compliant with tax laws and labor regulations. Here's a simple breakdown to help you get started:
1. Obtain an Employer Identification Number (EIN)
First, you’ll need to get an Employer Identification Number (EIN) from the IRS. This number is like a social security number for your business and is required for reporting taxes and other important documents. You can apply for an EIN on the IRS website.
2. Gather Employee Information
Collect all the necessary information from your employees to run payroll. This includes:
- Form W-4: Determines federal income tax withholdings based on employee details.
- Form I-9: Verifies employee eligibility to work in the U.S.
- State withholding forms, if applicable.
Payroll software such as Eddy can simplify this step by providing digital versions of these forms, automatically collecting the required information from employees, and securely storing it for easy access and compliance.
Ensure that all forms are filled out correctly to avoid errors in tax withholdings or payroll calculations.
3. Choose a Payroll Schedule
Decide how often you’ll pay your employees. Common pay period options include weekly, bi-weekly, semi-monthly, or monthly. Be sure to check state laws, as they may have specific requirements for pay frequency.
4. Calculate Gross Pay
For hourly employees, multiply the number of hours worked by their hourly wage. For salaried employees, divide their annual salary by the number of pay periods in the year. Don’t forget to account for any overtime, bonuses, or commissions.
5. Determine Deductions and Withholdings
Subtract all necessary deductions from the gross pay, including:
- Federal Income Tax: Use the IRS tax tables to calculate based on the employee’s W-4 form.
- State and Local Taxes: These vary depending on where your business operates.
- FICA Taxes: Includes Social Security and Medicare taxes. Both you and your employees contribute to these.
- Pre-Tax Deductions: Such as retirement plan contributions or health insurance premiums.
For more details on specific deductions and withholdings, refer to the Payroll Liabilities Guide.
6. Calculate Net Pay
Once you’ve determined the gross pay and applied all deductions, you’ll arrive at the net pay — the amount your employees take home. This is what you’ll pay them, either by direct deposit or check.
7. Pay Your Employees
Distribute the net pay to your employees on the scheduled payday. If possible, use direct deposit to streamline the process and reduce the chances of errors or delays.
8. File and Pay Payroll Taxes
Regularly file payroll taxes with the federal, state, and local tax authorities. The main forms you’ll need are:
- Form 941: Quarterly federal tax return for income tax, Social Security, and Medicare taxes.
- Form 940: Annual federal unemployment (FUTA) tax return.
Be sure to stay on top of tax deadlines to avoid penalties.
9. Keep Accurate Records
Maintain detailed records of all payroll transactions, including timesheets, pay stubs, tax filings, and employee information. This is crucial for tax compliance, audits, and resolving any discrepancies that may arise.
10. Consider Using Payroll Software
Managing payroll manually is a bad idea most of the time. It can be time-consuming and prone to errors. Consider using payroll software to automate calculations, track deductions, file taxes, and keep records. For more about simplifying payroll with automation, check out this article on Automatic Payroll.
Common Payroll Mistakes and How to Avoid Them
Payroll is one of the most critical functions of any business, and even small mistakes can lead to significant consequences, such as financial penalties, employee dissatisfaction, and compliance issues. To help you avoid these pitfalls, make sure to check out our Compliance Checklist for a helpful guide to staying on the right side of the law. Below are some common payroll mistakes and practical tips to avoid them:
1. Misclassifying Employees
Getting employees mixed up as contractors or misclassifying them can end up costing you big time in fines and back wages. For example, if you treat an employee as an independent contractor but the IRS or the Department of Labor (DOL) determines they are an employee, you could be responsible for unpaid taxes and penalties.
How to Avoid It:
- Understand the difference between employees and independent contractors. Employees are generally subject to company policies, work schedules, and receive benefits, while contractors operate independently.
- Familiarize yourself with the Fair Labor Standards Act (FLSA) to determine exempt and non-exempt status.
- Review the IRS guidelines on employee classification or consider consulting a labor attorney for complex cases.
2. Inaccurate or Late Payroll Tax Payments
Failing to withhold the correct amount of payroll taxes or missing deadlines can result in penalties from the IRS. The IRS charges a failure-to-deposit penalty of up to 15% for late payments, plus interest on the outstanding amount.
How to Avoid It:
- Mark all tax filing deadlines on a calendar or use automated reminders.
- Use payroll software to calculate and withhold the correct amount of taxes and make timely deposits.
- Regularly review IRS guidelines and state tax requirements to stay current with any changes.
3. Failing to Maintain Accurate Records
Maintaining incomplete or inaccurate payroll records can lead to compliance issues, especially during an audit. According to the Fair Labor Standards Act (FLSA), employers are required to keep payroll records for 3 years and time cards or wage tables for 2 years.
How to Avoid It:
- Implement a robust record-keeping system that securely stores employee data, timesheets, pay stubs, and tax forms.
- Regularly audit your payroll records to ensure accuracy and completeness.
- Consider using digital tools or payroll software that automatically tracks and stores this information to maintain compliance.
4. Incorrect Overtime Calculations
Miscalculating overtime pay for non-exempt employees can result in underpayment, employee disputes, and potential legal action. The FLSA mandates that non-exempt employees must receive 1.5 times their regular pay rate for any hours worked over 40 in a workweek.
How to Avoid It:
- Familiarize yourself with federal and state overtime laws, as they may have different requirements.
- Ensure you correctly classify employees as exempt or non-exempt.
- Use payroll software to automate overtime calculations based on employees' work hours and pay rates.
5. Neglecting to Account for Changes in Payroll Laws
Payroll laws and regulations can change frequently at both the federal and state levels. Failure to comply with new laws or regulations can lead to fines and other legal complications.
How to Avoid It:
- Stay updated on payroll law changes by subscribing to relevant newsletters, joining professional organizations, or regularly checking government websites.
- Think about teaming up with a payroll service that keeps an eye on legal changes and makes sure you're in the clear.
- Train your payroll team regularly on new laws and regulations that may affect your payroll processes.
7. Forgetting to Factor in Employee Benefits and Deductions
Incorrectly calculating deductions for employee benefits such as health insurance, retirement contributions, or voluntary deductions can cause payroll errors and employee dissatisfaction.
How to Avoid It:
- Review your benefits plans and ensure that payroll deductions match what is outlined in employee agreements.
- Use payroll software to automate benefit deductions and keep track of changes in employee benefits.
- Use payroll software that integrates with your benefits providers to automatically sync employee benefit changes and deductions, reducing manual work and minimizing the risk of errors.
8. Switching Payroll Providers Without Proper Planning
Changing payroll providers can be a complicated process that leads to errors if not managed properly, such as duplicated payments, missed deductions, or data loss.
How to Avoid It:
- Plan the switch carefully by gathering all necessary data, communicating with employees, and setting a timeline.
By avoiding these common payroll mistakes, you can ensure smooth payroll operations, maintain compliance, and keep your employees happy and satisfied. Taking the time to implement best practices and use the right tools will help you avoid costly errors in the long run.
Employee Communication Tips
Clear and transparent communication about payroll is key to maintaining trust and understanding within your team. Here are five essential tips to keep your employees informed and engaged:
1. Provide Clear and Detailed Pay Stubs
Make sure every employee receives a pay stub that clearly breaks down their earnings, taxes, deductions, and net pay. Include brief explanations for any new or unusual deductions to reduce confusion. This transparency helps employees understand their pay and builds trust.
2. Be Proactive About Changes
Whenever there are changes to payroll, such as tax rate updates or benefits adjustments, communicate them in advance using multiple channels like emails, meetings, or employee portals. Proactive communication gives employees time to understand and prepare for changes.
3. Encourage Questions and Open Dialogue
Foster an environment where employees feel comfortable asking questions about their pay. Let them know who they can contact with payroll concerns, and ensure that inquiries are addressed promptly and clearly. Open dialogue prevents misunderstandings and shows that you value their concerns.
4. Use Simple, Accessible Language
Avoid payroll jargon or technical terms that might confuse employees. Use plain language — like "take-home pay" instead of "net wages" — to make payroll information easy to understand. This approach reduces confusion and makes communication more effective.
5. Leverage Technology for Easy Access
Utilize digital tools such as HR software or employee portals to give employees easy access to their payroll information, including pay stubs, deductions, and tax documents. This convenience empowers employees to find answers on their own, saving time for both them and your HR team.
Options to Simplify Payroll for Small Businesses
Managing payroll can be a time-consuming and complex task for small businesses. However, there are several strategies and tools available to help simplify the process and reduce the chances of errors. Here are some small business payroll options to make payroll easier and more efficient:
1. Use Payroll Software
Investing in reliable payroll software is one of the most effective ways to simplify payroll. Payroll software automates many tasks, such as calculating wages, taxes, and deductions, generating pay stubs, and keeping track of tax filing deadlines. It can significantly reduce the time you spend on payroll processing each month and minimize the risk of manual errors.
Benefits of Using Payroll Software:
- Automated Calculations: Software automatically handles tax calculations, overtime pay, and deductions, reducing the risk of mistakes.
- Time-Saving: Automates repetitive tasks like data entry, allowing you to focus on more strategic areas of your business.
- Compliance Support: Keeps you up-to-date with the latest federal, state, and local tax regulations, ensuring you stay compliant.
- Integration: Some payroll software integrates seamlessly with time-tracking systems, HR software, and benefits platforms, making the entire payroll process even more streamlined.
2. Automate Time Tracking
Accurate time tracking is crucial for calculating payroll correctly, especially for hourly employees. Manual time tracking methods like paper timesheets or spreadsheets can lead to errors and inconsistencies. Switching to automated time-tracking tools that integrate with your payroll software can help ensure accurate and real-time data.
How Automation Helps:
- Reduces Errors: Automatically captures employee hours, reducing the chance of human errors.
- Improves Efficiency: Simplifies the process of collecting and verifying hours worked, saving time for both employees and managers.
- Ensures Compliance: Keeps a precise record of hours worked to comply with labor laws and overtime requirements.
3. Opt for Direct Deposit
Direct deposit is an efficient and secure way to pay your employees. It eliminates the need for paper checks, reduces the risk of lost or stolen checks, and ensures that employees receive their pay on time, regardless of their location.
Advantages of Direct Deposit:
- Faster Payments: Employees get paid more quickly, and there are no delays waiting for checks to clear.
- Reduced Costs: Saves money on printing checks and postage.
- Convenience: Payroll funds are transferred directly into employees' bank accounts, reducing administrative work and providing employees with immediate access to their earnings.
4. Integrate Payroll with Your HR and Benefits Systems
Integrating your payroll system with your HR and benefits systems can save time and reduce errors by ensuring all data is consistent and up-to-date across platforms. This integration enables you to manage everything from employee onboarding and benefits enrollment to payroll and taxes in one place.
Benefits of Integration:
- Streamlined Processes: Automatically updates changes in employee information, such as new hires or benefit adjustments, across all systems.
- Improved Accuracy: Reduces the likelihood of errors due to manual data entry or discrepancies between systems.
- Comprehensive Reporting: Provides a unified view of payroll, HR, and benefits data, making it easier to generate reports and make data-driven decisions.
For more details on how integration can simplify payroll, visit Payroll Analytics.
5. Schedule Regular Payroll Audits
Conducting regular payroll audits can help you identify errors, discrepancies, or potential compliance issues before they become significant problems. Audits involve reviewing payroll records, tax filings, and employee classifications to ensure everything is accurate and up to date.
Why Regular Audits Matter:
- Ensures Compliance: Helps identify and correct any compliance issues before they result in fines or penalties.
- Builds Trust: Demonstrates to employees that payroll is handled accurately, enhancing trust and satisfaction.
- Improves Processes: Identifies opportunities to streamline processes or implement better practices.
6. Keep Up with Payroll Law Changes
Payroll laws and regulations are constantly changing. Keeping up with these changes is essential to avoid fines, penalties, and compliance issues.
How to Stay Updated:
- Subscribe to Updates: Follow industry news, IRS updates, and state tax websites to stay informed.
- Join Professional Networks: Consider joining payroll or HR associations to stay connected with peers and learn from industry experts.
- Use Payroll Software: Most modern payroll software is automatically updated to reflect the latest laws and regulations, ensuring compliance.
How Eddy Makes Payroll Easier
Ever wish payroll could be as easy as clicking a button? With Eddy, it can be. Here’s how Eddy takes the stress out of payroll management:
Save Time Every Pay Period
Tired of spending hours on payroll? Eddy automates everything from wage calculations to tax filings, turning hours of work into just minutes. For example, Bill at Networking Solutions saved 2-3 hours each week just by switching to Eddy. "It's been a huge optimization for us," he says. "Now I can focus on more important things." Amy from RevRoad also shares, "Eddy saves me a lot of time because everything is in one place. It probably saves me 40% of my time."
Case Study
Learn how RevRoad found tools to streamline their hiring, onboarding, time tracking, PTO, payroll and more.
Case Study
Learn how RevRoad found tools to streamline their hiring, onboarding, time tracking, PTO, payroll and more.
Stay Compliant Without the Headache
Never worry about tax laws again. Eddy automatically updates its software to reflect the latest regulations, so you’re always in compliance and avoiding penalties. Bill from Networking Solutions mentions the peace of mind that comes with knowing Eddy's team handles all the tricky parts of tax filings and compliance. John from Mangrum Enterprises agrees, stating, "Eddy has made us much more compliant, and now I don’t worry about missing any details."
Empower Your Employees
With Eddy, employees can access their pay stubs, tax documents, and benefits information online anytime, anywhere. Less hassle for them, and less work for you! Amy from RevRoad notes, "The team has loved it… everything is in one place, and it's so easy to use." John from Mangrum Enterprises adds, “Eddy helps me track everything, creating a good work environment that I enjoy."
Easy Onboarding and Management
From hiring to retirement, Eddy streamlines every HR task, allowing new hires to get started fast and employees to manage their profiles without needing your constant help. Amy says, "Onboarding with Eddy is just a click of a button — everything new hires need is ready to go the day they start." John from Mangrum Enterprises echoes this, stating, "Eddy has automated our onboarding process, making it much faster and more efficient."
Support You Can Count On
Need help? Eddy’s customer support is always there to ensure everything runs smoothly. Bill from Networking Solutions appreciated the "white glove" service provided during the transition to Eddy, which made the change "simple and painless." Amy also praises Eddy's team, stating, “The Eddy team is on it, and they get it taken care of. It’s just a great support system.”
Wondering, how to set up payroll for your small business? Request a free demo today and see how Eddy can simplify your payroll!
Eddy's HR Newsletter
Sign up for our email newsletter for helpful HR advice and ideas.
