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Best practices for managing payroll effectively

9 min read

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 youcalculate the right rate of tax for each employee. If you don’t, you are liable forpenalties 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 aneffective payroll management systemin place, and you understand yourobligations as an employer.

In this post, we will discusshow to manage payroll effectivelyand share10 best practicesfor creating an efficient system in your business. We will also explain howpayroll softwareincluding theFactorial financial workspacecan help you streamline the process and ensure accuracy and legal compliance. That way, you canbuild a happy and productive workforce and avoid costly non-compliance penalties that can damage your business.

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Payroll management 101 

Whether you’re in the process ofsetting up payroll for small business, or your organization has been running for some time now, it’s important that youunderstand 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 aneffective 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 isthe 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 youpay the right taxesfor each employee,create and maintain accurate records, and process claims forexpense reimbursements. Plus, you need to keep up withevolving tax and wage lawsto make sure you arecompliant 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 yourretention and turnover levels.
  • When employees see that you consistently pay them correctly and on time, they trust you more. This helps toincrease employee satisfaction, motivation, and loyalty.
  • If you consistently pay late or underpay, it can negatively impactperformance 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 youremployer brandand helps youattract top talent to your business.
  • Failing to manage payroll correctly cannegatively 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 followingpayroll best practiceswill help you design and implementan 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 haveaccess to enough money to pay your employees in full and on time. You also need to ensure you have access to sufficient funds to covertaxes and benefitsandmatch all Social Security and Medicare contributionsthat you withhold from your employees at the end of each payment period. 

The best way to manage and reduce your payroll costs is touse the right tools and software. For example, theFactorial financial workspacehas all the essential data you need in one place. The Financial Workspace is the newest addition to theFinance 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 byupdating on its own and gathering real-time data.

You can use the tools to getvaluable insightson 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. 

Start automating 

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 canspeed up processing times, reduce the risk of errors, and run a far more cost-effective business. You can also getautomatic 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 likeW-2sand1099s. 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 includingpayroll 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, withFactorial’s payroll software, you get access to adashboard with a set of predefined reportsthat you can use to gainvaluable insights into your workforce expenses. You also get access to anencrypted document management systemso that you can store all employee records in your own secure and encrypted online database. That way, you areprotected against unauthorized access, ensuring compliance and saving you both time and space.

Have policies and procedures in place 

Make sure youdocument each step in your payroll process, includingexpense 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 ofinternal guidelines and regulations for managing each stage of the payroll process. This includes theadministration of salaries, timekeeping, payroll schedules, and payment methods. It also includes guidelines onwhat 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 theresponsibilities and accountabilities of all payroll staffand managers, including access and security levels.

Stay compliant 

One of the most vital aspects of payroll management is ensuring compliance. This means you need to understand allemployment laws relating to payroll and employee taxes. This includes the federalminimum wage law, the requirement to fileW-2 Forms, reporting and recordkeeping requirements, and any other state wage laws that might apply to your business, such as thepay transparency lawsseen in California, New York, Colorado, and Connecticut, to name a few.

You also need to make sure youregularly check for changes and updates to the law, such as the upcoming introduction of the 2023minimum wage increasein certain states. If you fail to keep up with your legal obligations, it could result inincorrect employee pay and withholdings calculations and tax liabilities. And this can lead tosignificant fines and penalties

Check out thisguide to payroll taxfor 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 rightpayroll trainingso that theyknow what their responsibilities areandhow your payroll software runs. This will help your staff develop a better understanding ofhow your procedures workand give themclarity on your payroll policies. Moreover, aside from creating an efficient department, offering the right training also helps youcreate a more cohesive teamand reduces the chances ofmisunderstandings or conflictsarising 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 tobe 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 toupdate 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 andmake sure you maintain open lines of communicationuntil 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 provideconsistency with salary or wage paymentsso that everyone in your business knows when they will be paid. It also helps your HR teamplan and execute their tasksso 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 somake 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 tofind 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 forpayroll outsourcing. This is where you contract a third-party service provider, known as aProfessional 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.  

Gather feedback 

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 theyunderstand your policies and proceduresand that they are happy with how everything is running. Encourage them toask questionswhen needed and submitsuggestions for improvement. Remind them that your door is always open if they have a query about their paycheck. 

You could even holdregular 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 whereemployees are motivated and willing to perform to the best of their abilities.

hr compliance calendar

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 useHR techin the form ofpayroll softwareto manage the process. The right solution can help youstreamline your processesandsafeguard your dataso that everything runs smoothly at the end of every payment period. Payroll software also makes it easier toensure accuracy with each and every paycheck, which is essential for legal and fiscal compliance.

AtFactorial, we understand that payroll management is a complex process. That’s why we want to provide you with asolution that centralizes all of your tasks on one, simple platform.

Features of Factorial’s payroll software include:

  • Bookkeeping
  • 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 astrong emphasis on data security. With Factorial, all database information isencrypted, helping you keep your sensitive data secure. The application uses aSingle Sign-On systemandvulnerability diagnosticsare 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 caneasily 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 createaccurate paychecksso that you can stay compliant and build ahappy, motivated, and productive workforce.

Cat Symonds is a freelance writer, editor, and translator. Originally from Wales, she studied Spanish and French at the University of Swansea before moving to Barcelona where she lived and worked for 12 years. She has since relocated back to Wales where she continues to build her business, working with clients in Spain and the UK.  Cat is the founder of The Content CAT: Content And Translation, providing content development and translation services to her clients. She specializes in corporate blogs, articles of interest, ghostwriting, and translation (SP/FR/CA into EN), collaborating with a range of companies from a variety of business sectors. She also offers services to a number of NGOs including Oxfam Intermón, UNICEF, and Corporate Excellence - Centre for Reputation Leadership.  For more information or to contact Cat visit her website ( or send her a message through LinkedIn.

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