How you manage payroll may be one of the most critical operations of your business. And effective payroll management can be a challenge even with the best software.
[This post, originally published in March 2015, has been revised and updated.]
It requires more than a software solution to implement efficient, accurate, and cost-effective payroll management processes.
Effective payroll processing isn’t just an essential business function. It is critical for maintaining employee morale and confidence. Your employees expect to be paid promptly, regularly and accurately.
How To Manage Payroll Like A Pro
An ineffective payroll process that is slow and overly complex can result constantly frustrated workers and occasionally angry ones when mistakes are made.
Complaints and employee claims are costly and unnecessary issues for your payroll department.
According to one report, payroll processes account for up to 35% of an average HR department’s time. Given that the scope of your HR department's responsibilities are probably expanding over time, it is essential that core functions such as payroll be managed effectively. Here are four payroll processing practices to help you accomplish just that.
Payroll managers and HR staff must work with a vast amount of information on a daily basis. There are dozens, if not hundreds, of names, numbers, records, and reports to manage. In addition, there are the numerous policies, rules, regulations and deadlines to comply with.
As employees move on and are replaced, or change roles within the business, new employees must learn the processes and procedures involved with payroll management. Without the information and tools being organized and easily accessed and used, there will always be the prospect of missed steps or actions in the payroll process, or errors being made.
Being optimally organized begins with having an effective system in place to keep track of it all. This can include tools to implement a prioritized daily, weekly, monthly and quarterly task list. This can be done using a computer program such as Microsoft Outlook. Making full use of software tools for managing the various types of information should be a priority, as well.
Regardless of how much information you have stored virtually, there will still be a need for managing hard copies of various forms. Establish a simple and "universal" filing system for storing them in chronological order. In other words, be sure everyone in your department is using the same system for filing. While it may seem a bit "old school", clear and legible labels on everything is essential.
This is important for your day-to-day operations, but also for when you’re audited. If everyone knows where everything is, and they can easily find and identify it, retrieval of that information becomes a simple matter. In addition, avoiding clutter is important. Another process to have in place is a system for identifying and disposing of out-of-date items. Some files can be removed to a "long term" storage location if they need to be kept on hand for a specified period of time.
You should consider conducting regular, ongoing audits. Frequent employee complaints about payroll are signals you should be conducting regular audits of the entire process. And one of the best ways to resolve payroll issues is with a detailed work flow analysis. What this means in practice is to use a flow charting tool, or similar method, that allows you to list each step of your process from start to finish.
This type of analysis can enable you to spot redundancies, "bottle-necks", and other problems with your payroll process. Oftentimes, reviewing and assessing your process, step-by-step, with your staff will result in an improved and innovated approach.
Keep in mind that your investigative analysis should be designed to find problems or shortcomings in your current payroll processing systems. The purpose is not to simply assure yourself that your process "seems to be working fine." The benefit of this analysis comes from intentionally looking for, identifying and documenting flaws in your process. Only then can you determine the additions, changes or corrections needed to ensure an accurate, efficient and more cost-effective payroll management process.
If your company uses a manual time card system you know that employees will sometimes enter incorrect information. However, simply using an automated system does not eliminate the need for regular audits. There are still potential errors that can be made such as incorrectly classifying employees, failing to adjust pay rates, or any number of other tax or benefit items.
Investigating the cause and source of errors should be a fundamental approach to how you manage payroll. While you and your staff may never be 100% accurate all the time, treating errors as a strategic opportunity for process improvement requires forethought and anticipation, as opposed to simply defaulting to a "fire fighting" mode when mistake do occur. Regular audits are a part of that approach.
The IRS and other government agencies are strict about enforcing payroll tax policies for small businesses. You already know that it is critically important for you and your staff to thoroughly understand your company's role in compliance. This also means you must keep informed of all the changes in federal and state government policies.
Another information requirement is being up to date with all government deadlines, as well as current tax filing, record keeping and reporting requirements. This is best accomplished by designating someone on your staff as the individual tasked with regularly researching, compiling and updating this information. All the other staff members can then be advised of pertinent changes and updates through regular meetings or email updates. (see next section below.)
Newsletters and publications from both government agencies as well as professional organizations are valuable resources of information. While it can be overwhelming, having a system in place for reviewing and archiving relevant notices, articles, and agency updates will allow you to have the information you need in a convenient and accessible location. And knowing who or where to call when the answers are not readily available is critical, as well.
Another critical aspect of information best practices for payroll processing is internal. It is absolutely essential that all staff that are involved with the payroll process are provided with any and all information they need to both do their specific tasks and to understand the overall process. This allows them to see and understand how their roles and contributions fit into the larger picture that is your payroll process.
One last point here: ongoing education for you and your HR/payroll staff is essential. Staying abreast of industry and professional changes is critical for maintaining an effective payroll process. Being regularly educated in the latest tools, technologies, and best practices should be seen as a strategic investment in you, your staff, and your department.
It is not enough to simply be "good" at what you do. Without clear and consistent communication no organization, no business, no department can function at it's best. It absolutely essential for effective management of your department's processes to have effective communications processes in place.
One often overlooked key is to provide your employees clear, written explanations of your policies and procedures. Too many businesses rely solely on one-off verbal instructions. Once is never enough! This is why it's good to periodically repeat these communications.
Business systems and procedures are notoriously inefficient. This is due largely to the fact that most of them are not documented. There is an old saying, "If it's not written down, it's just a rumor." This is true of your payroll processes and procedures. It's not enough to state them clearly and repeatedly. In fact, that is an unnecessary and inefficient approach to communicating procedures. A good alternative is to create a stand-alone employee payroll process manual that is available to all employees involved in payroll.
Communication for payroll management extends beyond your department, however. It is important that you, or someone associated with payroll, is easily accessible. Employees should have someone that they know they can approach with questions or issues regarding payroll and related processes.
Again, clear and consistent communication is essential and can eliminate, or at least minimize, many payroll issues, such as underpaid taxes or employee mis-classifications. This communication should include information on:
- How the payroll process works
- How employees are classified
- Employee reporting responsibilities
- Company procedures for handling payroll mistakes
If it isn't already, the company payroll policies should be put in writing and displayed prominently in your workplace. In addition, you should ensure that each employee has a written copy.
Simple Steps for a Payroll Management Process
Every company with paid employees has to manage payroll tracking and processing. Without an accurate and efficient payroll process, mistakes can be made. Payroll errors can be hurtful and costly for a business, as well as lead to legal issues with government entities and employees.
An effective payroll process does not have to be complicated, however. To illustrate this, we have put together some simple steps for setting up a basic payroll management process for a new business, or a business with its first paid employee:
1. Employee W-4 Forms
An IRS form W-4 records the number of dependents and allowances an employee claims. Dependents and allowances reduce the amount of tax that the employee must pay, which changes the amount of tax that must be withheld from each paycheck. Every new employee must fill out a W-4 form upon hire as well as employees who want to change their current withholding.
2. Federal and State EIN
An EIN is an Employer Identification Number, which is required for any business with paid employees. Companies doing business in the State of California use the federal EIN when filing various documents with the state. Therefore, a company's federal EIN is also its California EIN.
You can apply for and receive an EIN from the IRS by submitting a Form SS-4. This can be done online, by phone, by mail, or by fax. Typically, online filing is the fastest and simplest method.
3. Payroll Schedule
The most common payroll schedules in the U.S. are monthly, semi-monthly (twice a month), biweekly (every two weeks) and weekly. Most California employees have the right to be paid at least twice a month, with some exceptions such as school employees. As an employer, you can pay more frequently but not less.
Consider a payroll schedule that works well with your revenue cycle and regular expenses, but whatever payroll schedule you choose, communicate this with your employees and be consistent.
4. Paycheck Calculation
Calculating paychecks is largely dependent on the structure of your organization. For example, you may pay your employees an hourly rate or a monthly salary. In addition, there may be commissions, tips and job or piece rate wages. Whatever the pay structure your business has, it is critical to have a system in place to automatically track and calculate wages and other payments owed to your employees and for processing payroll.
Payroll processing can be done manually, but this can be time-consuming and prone to errors, which is why most companies make use of payroll software or third-party payroll management companies to help. Payroll software can be used to track time and attendance as well as other payroll information. This data can be used with the payroll software or by a payroll management vendor each pay period to calculate paychecks automatically.
5. Withholding and Paying Taxes
Employers are required to withhold the correct amount of taxes from each employee’s paycheck every pay period. These taxes that must be paid include federal, state, Social Security and Medicare, along with a portion from the employer for each employee at certain times of year.
In addition, California has four state payroll taxes which are administered by the EDD: Unemployment Insurance (UI) and Employment Training Tax (ETT) are employer contributions. State Disability Insurance (SDI) and Personal Income Tax (PIT) are withheld from employees' wages. Failure to pay on time can result in fees and penalties.
6. Submitting W-2s and Filing Tax Forms
Most employers are required to file IRS Form 941, the Employer's Quarterly Federal Tax Return, to report the federal income and FICA taxes withheld and paid during a calendar quarter. California state and local taxes must be filed quarterly, as well, depending on the local regulations. At the end of every year, IRS Form W-2s must be submitted to each employee.
Most payroll software can be configured to generate the necessary tax filing reports. Automation can save time and help you manage your payroll more efficiently and accurately.
When Payroll Management Outgrows Your Resources
For many small businesses, payroll is a challenge for their HR staff - oftentimes consisting of just one, or two, employees. For most other businesses, it's still the specialized functions such as medical benefits or tax reporting that are prone to error, especially if there are multiple states involved.
These businesses often find that outsourcing is a viable and effective option. It can allow a company to lower their overall payroll costs and provide more accurate and timely service to their employees.
In addition to the tips listed here, by outsourcing you can include the peace of mind of knowing that your payroll and other HR processes are being handled competently, accurately, and on time. On top of that, you can be assured that the accountability and liability for compliance rests with your vendor, freeing you from the constant pressure of staying fully informed and compliant with the ever changing - and growing - rules, regulations, and legislation.
Finding a Reliable Payroll Management Service
As a business owner or payroll manager you have a number of options for your payroll functions. Software that can be installed in-house, or cloud-based programs offer a good alternative.
But if you really want to take full advantage of the benefits available to you, outsourcing to a provider like Accuchex can still be the best decision. Reliability, full-service options, and reputation are the hallmarks of a quality payroll management service provider.
If you are currently looking to invest in outsourcing get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.