Payroll management can be complicated. Firstly, you need to make sure you pay your employees the correct amount for the work that they do, in a timely fashion. Secondly, you also need to make sure you calculate the right rate of tax for each employee. If you don’t, you are liable for penalties for non-compliance. In fact, in 2021 alone, the IRS estimated that it issued close to $37.3 billion in civil penalties from non-compliance with employment tax requirements.
This means that it is essential that you have an effective payroll management system in place, and you understand your obligations as an employer.
In this post, we will discuss how to manage payroll effectively and share 10 best practices for creating an efficient system in your business. We will also explain how payroll software including the Factorial financial workspace can help you streamline the process and ensure accuracy and legal compliance. That way, you can build a happy and productive workforce and avoid costly non-compliance penalties that can damage your business.
Table of Contents
Table of Contents
Payroll management 101
Whether you’re in the process of setting up payroll for small business, or your organization has been running for some time now, it’s important that you understand your obligations as an employer, especially when it comes to paying salaries and filing taxes. This means that it’s vital that you or your payroll manager design an effective payroll management system, and use the right payroll software to manage the entire process.
The first step is understanding what payroll is exactly.
Generally speaking, payroll is the process of paying your employees for the work that they do. In other words, paying their wages or salaries. However, this involves much more than just calculating what you owe them and issuing checks or direct deposits on time. You also need to make sure you pay the right taxes for each employee, create and maintain accurate records, and process claims for expense reimbursements. Plus, you need to keep up with evolving tax and wage laws to make sure you are compliant with local, state, and federal employment laws. If you pay your employees the wrong amount or fail to calculate their taxes correctly and on time, you could be liable for hefty non-compliance penalties.
Additional benefits of effective payroll management
Aside from legal compliance, creating an effective system for managing your payroll process is important for the following reasons:
- If you frequently pay your employees late or miscalculate what you owe them, it can lead to frustration and cause financial difficulties for your workforce. This can have a direct impact on your retention and turnover levels.
- When employees see that you consistently pay them correctly and on time, they trust you more. This helps to increase employee satisfaction, motivation, and loyalty.
- If you consistently pay late or underpay, it can negatively impact performance and productivity levels. Ultimately, if they don’t receive what they’re owed, there’s no incentive to give it their best.
- Effective payroll management can help you build a reputation as a reliable employer. This boosts your employer brand and helps you attract top talent to your business.
- Failing to manage payroll correctly can negatively impact your business finances. For one thing, there is the risk of legal penalties. For another, it’s also harder to keep track of how much money you actually have. And this could lead to bank fees or bounced checks if you rectify an underpayment once you have already authorized other supplier payments, for example.
Payroll management best practices
We’ve seen why effective payroll management is so important. Now, let’s discuss how to manage payroll in the right way.
The following payroll best practices will help you design and implement an effective system that keeps your employees happy and keeps your business compliant with the law.
Determine your budget
The first step in creating an effective payroll management system is identifying what your budget is. In other words, the impact that payroll expenses will have on your business’s finances. This is imperative as you need to make sure you have access to enough money to pay your employees in full and on time. You also need to ensure you have access to sufficient funds to cover taxes and benefits and match all Social Security and Medicare contributions that you withhold from your employees at the end of each payment period.
The best way to manage and reduce your payroll costs is to use the right tools and software. For example, the Factorial financial workspace has all the essential data you need in one place. The Financial Workspace is the newest addition to the Finance app on Factorial. It holds financial data and information for CFOs, payroll managers, and decision-makers. It does a lot of the work for you by updating on its own and gathering real-time data.
You can use the tools to get valuable insights on company costs and get answers to important questions like:
- The number of people reporting to you this month
- Monthly team costs
- How company costs are balanced through direct reporting
- The company costs managed by your direct reports
- Detailed view of reports with names, roles, company costs, cost centers, etc.
All this helps you keep a firm hold on your payroll costs. That way, you can process all payments in full and on time.
Even if you only have a handful of employees, processing payroll takes time and money, especially if you do it manually. Firstly, you have to gather all the right timekeeping data. You also need to calculate payments, determine tax rates and calculate payments for any benefits that you offer. Manual processes are also far more susceptible to mistakes that can result in severe penalties.
Automating your payroll management process is a far more efficient alternative. By using the right software to streamline and automate your system, you can speed up processing times, reduce the risk of errors, and run a far more cost-effective business. You can also get automatic updates and reports, collect employee data, automate the deduction calculation process, automatically trigger direct deposit payments, and get added data security with the right encryption features.
The same goes for filing tax documents like W-2s and 1099s. The best payroll software solution helps you automate and file the right forms with the appropriate agencies, helping you stay compliant at every level. Plus, by automating all these processes, you can free up time for your payroll managers. They can then focus on other more strategic tasks instead.
Organize employee records and documents
Recordkeeping is an important aspect of effective payroll management. It gives you access to important data including payroll costs, absentee rates, productivity levels, and tax payments. However, it is also important from a legal perspective. For example, IRS regulations require you to keep all payroll tax records for a minimum of four years. Many states also have their own recordkeeping requirements. Violations can result in costly fines from the Labor Department, IRS, and state agencies.
This takes us back to what we just discussed in the previous section. By digitalizing and automating your payroll management process you have access to all the data you need, and you can securely store it for as long as the law requires.
For example, with Factorial’s payroll software, you get access to a dashboard with a set of predefined reports that you can use to gain valuable insights into your workforce expenses. You also get access to an encrypted document management system so that you can store all employee records in your own secure and encrypted online database. That way, you are protected against unauthorized access, ensuring compliance and saving you both time and space.
Have policies and procedures in place
Make sure you document each step in your payroll process, including expense reimbursement, reporting, and check-handling processes. You also need to document each step of the process for filing payroll registers and tax reports. That way, you are protected from claims of non-compliance.
The best way to do this is by establishing clear payroll policies and procedures.
A payroll policy is an established set of internal guidelines and regulations for managing each stage of the payroll process. This includes the administration of salaries, timekeeping, payroll schedules, and payment methods. It also includes guidelines on what happens when an employee is under or overpaid, the deductions you are required to withhold by law, timekeeping and overtime rules, and the types of wages that employees receive. Plus, most importantly, your payroll policy defines the responsibilities and accountabilities of all payroll staff and managers, including access and security levels.
One of the most vital aspects of payroll management is ensuring compliance. This means you need to understand all employment laws relating to payroll and employee taxes. This includes the federal minimum wage law, the requirement to file W-2 Forms, reporting and recordkeeping requirements, and any other state wage laws that might apply to your business, such as the pay transparency laws seen in California, New York, Colorado, and Connecticut, to name a few.
You also need to make sure you regularly check for changes and updates to the law, such as the upcoming introduction of the 2023 minimum wage increase in certain states. If you fail to keep up with your legal obligations, it could result in incorrect employee pay and withholdings calculations and tax liabilities. And this can lead to significant fines and penalties.
Check out this guide to payroll tax for more information.
Look into payroll training for HR
The next step that we advise that you take relates to employee training.
It’s essential that your payroll manager and their team have access to the right payroll training so that they know what their responsibilities are and how your payroll software runs. This will help your staff develop a better understanding of how your procedures work and give them clarity on your payroll policies. Moreover, aside from creating an efficient department, offering the right training also helps you create a more cohesive team and reduces the chances of misunderstandings or conflicts arising between HR and the rest of your organization.
Be transparent with employees
Following on from the point we just made about misunderstandings, the best way to reduce conflict and ensure everyone is clear on your policies and procedures is to be as transparent as possible about your payroll process. Many issues such as underpaid taxes can be avoided by designing and implementing a policy that is founded on transparency.
A transparent payroll policy should include:
- How your payroll process works
- How you classify your employees
- The method you follow to calculate salaries, deductions, and withholdings
- Employee reporting responsibilities
- Your procedures for handling payroll mistakes
Once you’ve designed a clear and transparent policy, make sure all your employees have access to it. It’s also important to update it on a regular basis in line with any changes to the law. And if an employee raises an issue with their paycheck, rectify it as soon as possible and make sure you maintain open lines of communication until the error has been corrected.
Create a payroll calendar
Make sure you create a payroll calendar or schedule for managing your payments. This will help you provide consistency with salary or wage payments so that everyone in your business knows when they will be paid. It also helps your HR team plan and execute their tasks so that the entire process runs smoothly and efficiently.
In terms of the law, schedule requirements can vary. Some states limit when and how you are able to run payroll so make sure you check your obligations before you establish your pay periods. Many businesses tend to pay biweekly, but others pay their employees weekly, monthly, or even semimonthly.
There are pros and cons to all schedule types. Running payroll less often means less paperwork for your HR team. However, your employees may prefer to be paid more often. Aim to find the right balance between your cash flow requirements and the needs of your employees. And, above all, make sure your payment calendar is consistent. Define a schedule then stick to it.
Consider outsourcing based on your needs
If you have a limited staff, you might decide to opt for payroll outsourcing. This is where you contract a third-party service provider, known as a Professional Employer Organization (PEO), to process your employee salaries.
In a nutshell, a PEO is responsible for the payroll obligations that are normally handled by an HR department, including the calculation and payment of salaries and employee taxes. The IRS defines PEOs as statutory employers. This means that they serve as “co-employers” and they are “co-liable” for your workforce.
The biggest advantage of contracting a PEO is that it can save you time and help you stay compliant. However, this obviously comes at a cost. This is why many companies instead choose to manage payroll in-house. The key is using the right software to do the hard work for you.
Finally, the best way to create an optimal payroll management system is by regularly collecting feedback from your workforce. Check in with your employees regularly to make sure that they understand your policies and procedures and that they are happy with how everything is running. Encourage them to ask questions when needed and submit suggestions for improvement. Remind them that your door is always open if they have a query about their paycheck.
You could even hold regular staff meetings where you can discuss payroll issues. This will help your workforce feel confident and satisfied with your process. And this is the key to nurturing an environment where employees are motivated and willing to perform to the best of their abilities.
Let Factorial help you with payroll management
Even if you are a small business, payroll can be a complicated process, especially considering the risk of non-compliance claims. For this reason, many companies choose to use HR tech in the form of payroll software to manage the process. The right solution can help you streamline your processes and safeguard your data so that everything runs smoothly at the end of every payment period. Payroll software also makes it easier to ensure accuracy with each and every paycheck, which is essential for legal and fiscal compliance.
At Factorial, we understand that payroll management is a complex process. That’s why we want to provide you with a solution that centralizes all of your tasks on one, simple platform.
Features of Factorial’s payroll software include:
- Variables and supplements
- Employee and supplement observations
- New hires and termination notifications
- Sick leave notifications
- Contract update notifications
- Payroll folders
- Customized payroll reports
- Custom notifications and automation features
- Payslip templates
What’s more, Factorial’s payroll software is a solid SaaS solution with a strong emphasis on data security. With Factorial, all database information is encrypted, helping you keep your sensitive data secure. The application uses a Single Sign-On system and vulnerability diagnostics are performed regularly. This makes it a great solution for businesses looking to protect their data and stay compliant.
Finally, because our payroll software is included in our comprehensive HRIS, you can easily integrate your employee time tracking data with your payroll system. That way, you can automatically generate the hours that each employee has worked. You can then calculate payroll taxes, PTO, and sick days accordingly. This makes it much easier to create accurate paychecks so that you can stay compliant and build a happy, motivated, and productive workforce.