Avoiding Payroll Pitfalls: How to Do Payroll for Small Business
Small business owners are rarely payroll experts, but that doesn't mean they have to fumble through the process and potentially make costly errors. Building a payroll team with internal and external partners can help small and medium-sized businesses learn how to do payroll correctly, while keeping up with compliance rules and best practices.
In many ways, managing a small business can feel like fighting for survival on a desert island. It's a big challenge, and obstacles often come up unexpectedly. Small business owners can become overwhelmed by what it takes to run a successful business and ensure their employees have a great experience. With the right tools and processes in place, a small business owner can turn their desert island into a paradise.
Payroll can quickly become overwhelming. From tax withholding, benefit deductions, compliance and operating in multiple jurisdictions, the desert island of small business can become even more daunting.
It's crucial to ensure wage payments are accurate, on time and in accordance with state and federal regulations. Learning how to do payroll for a small business the right way can mean the difference between a thriving organization poised for growth and one that is crushed under the weight of expensive penalties.
Finding the right payroll partner is an imperative investment in the health of any small or medium-sized business. The right solution ensures payroll compliance while aligning with industry best practices and cutting-edge technology, taking the burden of payroll off the shoulders of their small business partner.
Most common payroll challenges for small business owners
The biggest payroll-related challenge for small business owners is simply a lack of knowledge, says Teri Gratz, senior program manager of small business services at ADP. For this article, Gratz shed some light on payroll challenges, processes, best practices and available support resources tailored to help small and medium-sized businesses get to where they want to be.
"The sheer complexity of doing business in the United States, with all the state and federal laws, could make any small business owner feel lost," says Gratz. "Small business owners often don't know how to pay their people. That's a big deal. They may not know the best way to recruit, hire or end employment, and they're not familiar with compliance rules. And they can't keep up with legislative changes because they happen so fast."
Since most small business owners wear many hats, becoming a payroll expert is not typically a realistic option. In many cases, hiring a dedicated HR person is out of reach. This lack of in-house expertise can leave a small business vulnerable to ever-changing state laws and practices that could have a detrimental impact on their business and their employees. According to Gratz, common errors include "misclassifying workers, a lack of fraud protection and data security, incorrectly calculating wages or failing to make tax payments."
What should a small business payroll team look like?
Sometimes, small business owners can be so focused on running their business that payroll becomes an afterthought — which could lead to financial and legal trouble. To avoid costly errors, small and medium-sized businesses need to build a payroll team (likely made up of internal and external members) that collectively knows what needs to be done.
For many small businesses, those key experts would include:
In-house payroll processor (the owner, manager or designated HR person)
A trusted banking partner to help with funds availability, cash flow and possibly a line of credit to help ensure employees can be paid on time
A CPA and/or compliance attorney to help keep business practices up to date with legal requirements
An outsourced payroll support partner that offers technology solutions, expert advice and ongoing support
While adding internal or external partners to a small business payroll team might mean a larger financial investment, business owners should consider such expenses an investment in protecting the company's future financial health. For instance, on the surface, working with a compliance attorney may seem like an additional cost. However, that person can help keep a small business compliant with ever-changing state and federal regulations, thereby likely avoiding the risk of expensive fines.
However, there are ways to mitigate cost. Some payroll vendors offer tiered packages, supplying a small business with the services it actually needs rather than charging for functions it won't use. For example, working with a payroll partner that also provides HR compliance can help address the expense while still providing expert support to manage risks and follow best practices.
"Many small business owners may not realize that labor law posters have to be posted in a visible area," says Gratz. "And if they're using an in-house payroll system, they need to make sure that system is updated because the rules change for tax withholding percentages as well."
Benefits of working with a payroll partner
Partnering with a payroll solution service can help small business owners address nearly all of their common payroll challenges with one relationship.
Employment law compliance
Working with a CPA or a compliance attorney can help a small business owner stay on top of ever-changing regulatory requirements, ranging from tax percentages to paid leave practices to poster compliance. In fact, many payroll providers will automatically send out new posters to their partners when regulations change, making it easy for small business owners to stay in compliance.
Payroll deductions and withholdings
Ensuring accurate paycheck withholdings — such as medical premiums, retirement contributions and FICA — should be a top priority for efficient, error-free payroll. Paying employees correctly is about much more than calculating their hours or keeping up with pay increases and time off.
Tax filing and payments
Making tax payments on time is crucial for avoiding costly penalties and staying in good standing with local, state and federal governments. Working with a trusted payroll vendor can relieve this burden, allowing the business owner to focus on running their business.
Record keeping
The right payroll partner doesn't just help educate small business owners about record keeping rules. They also help maintain those records on their behalf — sometimes, even for a period of time after they move on to a different payroll solution. Having easy access to accurate records is essential for responding to audits, investigating errors and providing documentation for legal proceedings.
Employee self-service options
Providing self-service tools, like a mobile app, that allow employees to make changes or get quick answers to basic questions saves time and empowers employees. "Employee self-servicing is so paramountly important," says Gratz, "because the employee can make their own bank account changes, they can handle their own W4 information online. They can manage their time cards and access HR handbooks too."
Data security and fraud protection
Most small business owners are not well-versed in cybersecurity. Partnering with a payroll solution that comes with the latest security protocols, tools and guidance to help reduce the risk of data breaches is a worthwhile investment to protect your employees' personal information as well as crucial business data.
Time savings
Small business owners are busy people who are responsible for a lot of spinning plates. Typically, those responsible for payroll in small and medium-sized businesses don't have the time to learn about every aspect of payroll, taxes, record keeping, etc. Contracting with a trusted payroll partner who employs experts and has a proven track record for supporting small businesses is a smart move to help ensure payroll processes meet compliance rules and to reduce the risks of financial penalties.
Unlock small business growth with smart payroll solutions
The most important thing for business owners to know about payroll is this: "You're not alone," Gratz says. Running a small business may feel like being on a desert island at times but support is available to help build confidence in compliance and perfect their payroll processes for current and future needs.
The right team — combining in-house personnel with external experts — can provide comprehensive support tailored to a business's needs. As Gratz emphasizes, understanding and navigating payroll regulations can be daunting, but with the right resources, you can ensure accuracy and efficiency. Investing in a reliable payroll partner is not just about managing payments; it's about empowering your business for a prosperous future.
Curious if a payroll service provider is right for your business? Download our guide: How to choose a payroll provider for your business.
