Payroll Processing Best Practices For Small Businesses In 2024

Small business owners have a lot to juggle, from managing the everyday running of the business, like filling out paperwork, to managing inventory, among others. As a result, managing your payroll may be the last thing on your mind.

Unfortunately, a poorly managed payroll can have devastating consequences on your business, such as unsatisfied employees resulting in a high turnover or severe penalties for non-compliance with employment laws.

While there is no way of making payroll management 100% stress-free, knowing the best practices can make it less challenging. Here are some best practices for payroll management for your small business that you need to know.

There are two classes of workers; employees and independent contractors. The difference between employees and independent contractors is the hiring entity's level of control over each.

Employees are under their employer's control regarding how, where, and when they can work.

On the other hand, an independent contractor is hired to perform a specific task, and the hiring entity does not have much control over how they execute their duties.

Employee misclassification can cause problems with the IRS that could see you facing charges since the two classes of employees pay different taxes.

Most employers have ditched traditional payroll management processes and tools for more efficient software solutions that easily integrate with accounting systems and time-tracking tools to process employees' pay automatically.

Besides making the process significantly easier, it can be much cheaper, and you eliminate the chances of errors resulting in pay disputes or non-compliance with employment and tax laws.

Having the best payroll system is great. But it can only serve you best if there is a matching policy. A policy guideline acts as your business's source of truth in matters of payroll management. With a policy guideline, all persons involved in payroll management will have a reference point that helps maintain consistency.

It also helps existing, and new employees understand what they should expect regarding payroll. Your payroll policy should cover aspects such as components of the pay, payroll schedule, payment methods, payroll preparations, and post-payroll reporting.

The payroll schedule should be part of your payroll policy. But policy only works if implemented, which calls for discipline. Understandably, you may have a lot on your hands as a business owner and may be tempted to push the payday by a day or two when you are caught up with more pressing concerns.

Unfortunately, this can result in huge inconveniences to your employees that depend on consistent pay to pay bills, loans, etc. Inconvenienced employees will be less motivated and more likely to leave.

An excellent way to ensure you are timely is by using payroll software that has direct banking capabilities. But even then, its ability to make direct payments will depend on the availability of funds in your account, so you may also need to set reminders to ensure you are not caught by deadlines unawares.

Transparent payroll management is key to employee satisfaction. Employees want to know that they are getting what their input is worth, and there is no better way of achieving transparency than providing your employees with pay stubs at the end of each employment period.

Paystubs provide employees with a breakdown of their pay, including their gross pay, deductions, payment period statutory deductions, and net pay. That way, the employee can see if they are getting what they deserve. Manual pay stub generation can be tasking, and you may want to opt out, especially if you live in a state where it is not mandatory.

But there are easier ways of pay stub generation. For example, you could leverage tools such as FormPros pay stub generator, which helps you generate pay stubs in a few easy steps and in minutes.

Irrespective of the approach you employ to payroll. It is never going to be without its challenges. Also, you will have to dedicate some time to it. If you are caught up with a lot and don't have the time to manage your payroll, you could consider outsourcing payroll management to a payroll service provider.

Payroll service providers do all the hard work for you. You will only need to provide them with the funds for paying your employees and commissions for the work done.

Managing your payroll means handling your employee's sensitive data, including their contact information, social security number, and bank details. So, you must ensure you go to all lengths to protect that data. If you manage the payroll using payroll software, cloud-based solutions are the best way to secure your employees' and customer data.

If you are outsourcing your payroll, having proper data processing agreements with your payroll service provider is critical to ensure that the information they access about your employees remains confidential.