Payroll FAQs for Small Businesses
No matter the size of the business, business owners often have very similar questions when it comes to payroll. They want to know what it takes to run payroll—what information and other resources are needed—and what tactical steps are involved. They always want to know how much time and money it’s going to take to support the payroll function. And, while many may not realize it, they need to know what they need to know and do to comply with the law. Go ahead, read that last sentence once again. It’s not a typo. You don’t know what you don’t know—and often employers may not be aware of the necessary particulars when it comes to employee pay and employment law.
This article will provide answers to some of the most frequently asked questions about getting your employees paid and complying with the dizzying array of laws governing paying and employing people.
WHAT STEPS ARE INVOLVED IN GETTING MY EMPLOYEES PAID?
Paying your employees involves four basic steps:
- Setting Up Your Payroll System
- Classifying Jobs and Collecting Employee Information
- Calculating Pay and Issuing Paychecks
- Paying and Reporting Employment Taxes
WHAT INFORMATION AND SKILLS WILL I NEED?
First, you will need a federal EIN and, in some instances, a state employer ID. You will need forms and information about each of your employees. For example: Form W-4 along with state and local tax withholding forms, Form I-9, date of birth, verified Social Security Number, wage rate, job classification, hours worked and paid time off taken during the pay period, and employee banking information in the event you offer employees the option to receive their pay by direct deposit.
In addition to your company and employee information, you will need a solid understanding of all federal, state, and local wage and hour laws as well as laws governing job classification, discrimination, unemployment, workers’ compensation, and employer tax responsibilities. Links to key federal laws found on the US Department of Labor website are included throughout this article. You can find state-level information at each state’s department of labor. Other good resources include SHRM, FindLaw, Employment Law Handbook, and free advisors who volunteer at SCORE —a resource partner to the Small Business Administration.
Even if you feel you have a good grasp of these subjects, consulting with your accountant, a Human Resources professional, or an attorney specializing in employment law will be money well spent. Paying people you employ is one of the most complex and regulated aspects of owning a business. Having seasoned professionals overseeing or, at the very least, consulting your business will serve you well.
Lastly, if you offer benefits like medical and dental insurance and/or a retirement plan, you will need to deduct the employee contribution amounts for each benefit in which they are enrolled. To do this, you will need to know which benefit deductions are pre-tax and how pre-tax benefits are treated when calculating federal income tax, FICA, and state and local taxes. The regulations and allowable limits for pre-tax benefits change often. You should consult an accountant specializing in tax, an attorney specializing in employee benefits (ERISA), or an experienced HR or payroll consultant to ensure you understand how to maximize the value of pre-tax deductions for your employees and comply with the law. To help you get started, see our articles Accounting 101 for Small Business and Small Business Taxes 101.
SHOULD I DO PAYROLL MYSELF OR HIRE A PROFESSIONAL?
Every situation is different and you will need to consider your unique situation before you can answer this question. For many small businesses just starting out, it may not make sense or be feasible to hire resources to support the payroll function.
A few helpful questions to ask yourself to help you make the best choice:
- Do I have the time to handle payroll myself and what is the value of my time?
- What responsibilities directly linked to increasing revenue and growing my business will need to be set aside to ensure I have enough time to deal with payroll?
- Can I afford to hire someone, invest in payroll software, or outsource payroll?
- What are my options and what do those cost?
- What are the risks associated with the payroll function and am I able to ensure that all of my responsibilities are well attended to?
WHAT ARE MY PAYROLL SERVICE OPTIONS?
Option 1 – Doing Payroll In-House Using Payroll Software
If you are confident you have the time and skills to handle payroll in-house, you can go the DIY route or hire an employee to help with payroll and other administrative tasks. Either way, you should expect to invest in payroll software. According to a recent survey by Clutch, over half (53%) of small businesses use accounting software like Quickbooks to manage their finances. In fact, their survey showed Quickbooks was the most popular accounting software—74% of businesses in their survey indicated they used Quickbooks. Given the efficiencies and benefits of an integrated payroll process—and the regulatory risks involved with paying employees and employment-related taxes—spending money on payroll software that is integrated with your accounting system makes sense. Pricing for Quickbooks desktop starts around $29/per month and you will need Quickbooks 2015 or later. Intuit frequently offers special promotional discounts and you can try their payroll software for free. Payroll Mate is another desktop payroll software solution. It will cost about $120 to purchase the software. For more information check out our article on the Best Payroll Options for 2019.
If it is not feasible for you to process payroll and handle the other administrative tasks associated with it, you will need to factor in hiring a part-time or full-time administrative assistant or payroll clerk in addition to the cost of payroll self-service/desktop software. According to the Bureau of Labor Statistics, the median pay for administrative assistants as of 2018 is $18.69/hour. For very small businesses, administrative assistants have the skills needed to process payroll. If your company is larger, you may want to hire a clerk specializing in payroll. The median pay for a Payroll/Finance Clerk is $19.02/hour.
In addition to their hourly rate, when determining the cost of hiring someone you should factor in the cost of things like benefits, payroll taxes, unemployment and workers’ compensation insurance, training, office space, and equipment.
Option 2 – Online Payroll Services
With an online payroll service provider, you will still need to allow time to enter some payroll information like hours worked and you’ll need to maintain your employee payroll records; but, online solutions offer more to support other aspects of employing people. Thanks to advances in technology, business owners have several affordable options when it comes to online payroll solutions and some of those solutions, like Gusto and OnPay, include HR and benefit solutions in addition to core payroll.
Intuit On-Line Payroll is amongst the top online payroll service picks overall, as it seamlessly integrates with Quickbooks, a mainstay for bookkeeping. The base fee for Intuit On-Line Payroll runs between $20-$109/per month.
OnPay is great for very small businesses, with a base fee of $36/per month.
Gusto and great pick for Sole Proprietors or S-Corps. Gusto’s base fee is $39-$149/per month.
Surepayroll might be a great choice for household small businesses. Their online solution has a base fee of $39.99/per month. In addition to the base monthly fee, expect to pay a smaller, per employee fee.
WHAT ABOUT REGULATORY COMPLIANCE?
When it comes to payroll, you’ll need to be sure you know and comply with federal, state and local wage and hour laws. In addition, you will need to classify jobs correctly for purposes of paying overtime, deposit payroll taxes on time, and file employer tax returns on or before the filing deadline.
A Few compliance measures to be aware of:
Display Mandated Posters – Make sure all posters required by law are purchased and placed where all employees will see them. Employee bulletin boards in a break room are usually good places to display required posters. For example, the Department of Labor requires employers to display a poster notifying employees of their rights under the Fair Labor Standards Act, which includes rights to a minimum wage and overtime pay. Posters covering equal pay, laws prohibiting discrimination, and those around safety are also required. A good resource to determine and purchase labor posters is online at the Labor Law Center. Expect to pay around $30 each for federal and state posters. Many online payroll service providers offer these posters as well—or you can usually download printable posters free on federal and state department of labor websites. Whichever option you choose, be sure to display posters that comply with all applicable federal, state, and local laws.
Keep Good Records – Establish policies for how records and files will be maintained. DOL Fact Sheet #21 is a great resource for understanding what records need to be kept and for how long. State laws vary and some state laws, like California and New York, are more stringent than the federal law. For example, California requires that records documenting meal breaks be maintained. Both California and New York require payroll records be maintained for six years versus the three years required under federal law.
You will need to develop record keeping processes and policies to ensure your company complies with both federal and state rules. Because state laws vary, you should seek the advice of an attorney specializing in employment law to understand your state and local record-keeping requirements.
Pay People Fairly and Do Not Discriminate – Even small business owners must comply with federal anti-discrimination laws and those laws include what people are paid. The federal requirements that apply to your small business vary by the number of employees. In general:
- If you have at least one employee: You are covered by the federal The Equal Pay Act of 1963 (EPA). As such, you are required to provide equal pay for equal work to both male and female employees.
- If you have 15 to 19 employees: You must comply with laws that prohibit compensation and other forms of discrimination based on race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, disability, and genetic information (including family medical history) in addition to laws governing equal pay. These federal laws include:
- Title VII of the Civil Rights Act of 1964 (Title VII)
- The Pregnancy Discrimination Act
- Title I of the Americans with Disabilities Act of 1990 (ADA)
- Sections 102 and 103 of the Civil Rights Act of 1991
- Sections 501 and 505 of the Rehabilitation Act of 1973, and
- The Genetic Information Nondiscrimination Act of 2008 (GINA)
- If you have 20 or more employees: In addition to the EPA and federal laws prohibiting discrimination based on race, color, religion, sex, national origin, disability and genetic information, you must comply with the The Age Discrimination in Employment Act of 1967 (ADEA), which forbids age discrimination against people who are age 40 or older.
For more information about the legal responsibilities you have under federal laws, visit the EEOC website.
State and local laws vary and your state and local requirements can best be determined by consulting with a Human Resources professional or a licensed attorney specializing in employment law.
The payroll area is one of the most complex and regulated areas of your business. Due to the complexity, need for solutions to be scalable, and the very real risks associated with not getting payroll right, most small business owners decide to invest in an online payroll solution that is either self-service or full-service. Advances in technology has made doing so easy and affordable. Having payroll and other employee data readily available by leveraging technology helps business owners save time, avoid costly mistakes, meet record-keeping requirements, and routinely audit for compliance.
In addition to payroll software or an online payroll service, small business owners benefit from the sound advice only experienced HR professionals, attorneys specializing in employment law, and accountants specializing in tax can provide. Locating an expert in your area is as easy as a Google search.
When it comes to payroll, learn what you don’t know and invest in the resources you need to pay your employees on time, comply with the law, and protect your business. Solutions are available to fit every budget and it will be money well spent.
Disclaimer – The author of this article is not a lawyer and the information contained in this article does not constitute legal advice. Every business owner’s circumstances are different and business owners should consult with a licensed attorney specializing in employment law and a tax accountant to ensure they are complying with federal, state, and local laws.
May 30, 2019
Debra Richards is a freelance consultant specializing in HR and payroll process improvements and system implementations, as well as merger and acquisition integration. She holds a Six Sigma Black and has a successful history of adding value and leading transformational change for a Fortune 500 company.