On the surface, managing the payroll process may seem like a simple, straightforward task. You provide paychecks to all your employees on time, and everyone in your company is happy. That seems easy, right? In reality, there is a lot more to the process than meets the eye – and you’re not alone if you feel stressed trying to handle all its moving parts.
When you really get down to it, payroll processing for each of your employees involves in-depth knowledge of wage laws and payroll taxes at the local, state, and federal levels, employee deductions, your company’s internal processes, and most importantly – patience. That doesn’t sound so straightforward, after all, does it? In order to reduce your stress, here are guidelines for creating a more manageable payroll processing experience.
1. Document Everything
Payroll involves a lot of paperwork. It’s best to stay on top of it from the get-go. Start your employees off on the right foot by making sure they have the proper paperwork filled out when they begin employment. That includes:
- Federal W-4
- State withholding forms (these can change based on where your employee lives and works)
- Local withholding forms (some states, like Ohio and Michigan, withhold local taxes and require local withholding forms to be filled out)
- Form I-9
While these forms are integral to your payroll processing, there is other information you should have readily available in some format, such as:
- Independent contractors versus employees. This matters because your independent contractors do not have employee or employer taxes withheld while employees do. And some independent contractors could very well be hired on as full-time employees between pay periods so it’s a good rule of thumb to be in constant communication with your hiring managers.
- Exempt and nonexempt employees. This is also important to note because exempt and nonexempt employees are paid differently. For instance, an exempt employee is one who passes the Fair Labor Standards Act (FLSA) salary and duties tests. They will make the same amount each pay period. A nonexempt employee does not pass the tests and is typically paid by the hours they work — meaning you have to collect their hours through your company’s time-tracking system and pay them overtime.
- Overtime rules and calculations. Calculations for overtime are not always as simple as time and a half for hours past 40 in a week as mandated by the FLSA. First, it’s important to know there are some exceptions to the federal law for nonexempt employees with emergency services and hospitals. Second, state laws may have daily regular-time maximum hours that will affect overtime calculations for a given pay period. Also, if an employee works different jobs with different pay rates within the same week, it makes the overtime calculation a bit tricky. Being familiar with the FLSA and your state’s overtime rules will ensure you’re calculating overtime correctly.
- Your pay schedule (weekly, biweekly, semimonthly, or monthly). Knowing your pay schedule in advance helps you know when to begin preparing for payroll and what federal banking holidays might fall on or adjacent to a check date that will require you to move your processing day up. As part of your year-end process, set reminders for each processing day throughout the following year.
- The total number of hours and expense for each payroll. Again, without knowing the types and number of employees you have, this can be difficult. If you have only exempt employees, your hours and wages paid will not change (even if they take PTO). However, nonexempt employees can earn overtime. If you have nonexempt employees, your hours and wages paid may fluctuate, and you’ll want to monitor it closely to control labor costs and manage cash flow. If your nonexempt employees are consistently working past 40 hours, this could be a sign of an issue with your businesses processes.
Now, a lot of the facts that determine payroll withholding are subject to change, and that can affect your payroll processing at any time throughout the year. For example, any of your employees can make changes to their federal W-4, affecting how much you should withhold from their paychecks.
Similarly, your employees may move to a different city or state. Local taxes are found in several states including Ohio and Pennsylvania, two of the most complex local tax law states in the country. Moving from one city to another within these states can affect taxes. For companies who operate in multiple states, when employees move, you may have to alter their state withholding tax rate. For some businesses, employees may live in one state and work in another, which brings up the issue of nexus and reciprocity.
2. Retain Documents
After collecting all the necessary documents on every employee in your business, it’s essential to maintain those records somewhere you can easily find them – whether it’s storing digital versions of your documents or securing them in filing cabinets. The U.S. Equal Employment Opportunity Commission requires you to keep all personnel records for one year and all payroll records for three years. Forms I-9 should be kept in a secure location separate from the employee’s other records so that they are ready for inspection upon request by the Department of Homeland Security, Department of Justice, or Department of Labor.
3. Keep a Calendar of Tax Payment Due Dates
You must report and deposit your income, Social Security, and Medicare taxes to the IRS throughout the year, depending on your payroll size. For example, if you have a large payroll, you’ll need to make payroll tax deposits based on the semiweekly rule. If your payroll is smaller, you’ll deposit your taxes on the 15th of each month. If the 15th falls on a weekend, the date is moved to the next weekday. Reporting for these taxes is quarterly via IRS Form 941.
And, don’t forget about due dates for federal unemployment taxes as well as state and local tax filing and payments. To remember when your taxes are due, consider keeping a calendar with all critical dates pertinent to your business or bookmarking this page on the IRS website.
Read more: For an overview of payroll taxes, see Payroll Tax Rules for Employers.
4. Watch the Laws
While payroll may seem like a steady phenomenon, laws can and sometimes do, change quickly. Keep an eye on them because the IRS can penalize employers who don’t withhold taxes correctly for their employees. Here are specific laws to watch closely:
- State minimum wage (if the state’s minimum wage is higher than the federal $7.25 rate, you must pay your employees the higher rate). States across the country have been consistently raising their minimum wage rates, with many vowing to reach a rate of $15 per hour by 2020. If you have hourly employees, this is imperative to note.
- Local, state, and federal payroll tax laws and withholding rates. Most changes take place at some future date, such as the beginning of the following year, and allow for proper planning and implementation of new rules and rates. Sometimes, however, changes are introduced midyear and are made retroactive to the beginning of the year, requiring significant work to recalculate taxes and make additional payments.
- Laws relating to the Fair Labor and Standards Act. The FLSA establishes the federal minimum wage, overtime, recordkeeping, and child labor laws. Keeping on top of it is critical to any payroll department because if an update to the federal minimum wage surpasses any state minimum wage, you’d have to pay your hourly employees the federal rate. Additionally, the FLSA determines how nonexempt employees are classified.
The Society for Human Resource Management, American Payroll Association, and the IRS are examples of reliable resources to help you monitor changes and stay up to date.
Read more: Tips for handing employment tax notices
5. Review Your Internal Processes
While it’s vital to know federal, state, and local laws and practices, you must also be familiar with your internal policies that affect payroll. This includes paid time off, sick pay, benefits, 401(k), and commissions.
Every business is different in these regards. Some companies may pay for their employees’ health insurance, while others will withhold it from each employee’s paycheck depending on the plan. You may offer different levels of paid time off accruals to employees based on years of service or career level within the company. Your commission or bonus plan may have complex rules that affect who is compensated and at what level. Do you offer a 401(k) match and if so, who is eligible? All of these affect payroll and must be documented and monitored.
This sounds like a lot to remember, but much of your payroll stress can be reduced by remaining proactive and enlisting help from department managers to communicate changes to you and to remind employees of policies, and other payroll-related actions they may need to take.
6. Add Automation
Thanks to the digital age, online payroll and payroll software automate some of the more tedious administrative payroll tasks giving payroll professionals more time to focus on more strategic projects. These payroll services can:
- Provide direct deposit and electronic paystubs, which saves you time and paper.
- Keep track of tax changes, so you’re always withholding the correct amount.
- Handle new hire reporting and onboarding, so adding new workers is seamless. Information the new employee enters flows to payroll and their documents remain on file in a digital format.
- Provide online and mobile time clocks so you don’t have to fuss with old-fashioned timesheets; you’ll also no longer have to ping managers to remind them to review and submit hours.
- Provide software that allows your employees to make changes to their addresses and W-4 forms themselves, with updates being made automatically.
Payroll processing involves your employees’ personal cash flow, and the seriousness alone can create anxiety. All of the work required to stay on top of a complex function like payroll can add to the stress. But by being proactive with your schedule, managing and securing documents, and tracking withholding rates and tax laws as well as your own business practices, it can be a little less daunting. Lean on organizations like the American Payroll Association or Society for Human Resource Management for the latest payroll news. Create a network of professionals such as your CPA and other payroll practitioners to share best practices. And reach out for help when you’re having trouble covering the most essential parts of the payroll process. All of these steps will help you create more stress-free payroll processing experiences throughout the year.
Read more: See our tips for managing a successful payroll year-end.