Business is going well, your employees are happy, and you’re growing a loyal customer base. But there may still be one piece of the puzzle missing in your small business operations — figuring out how to make payroll less of a chore.
But paying staff, keeping records, and managing taxes don’t have to create hours of extra work for you each week. With the right process and tools, you’ll get more face-to-face time with employees and customers and prevent payroll from running into your free time.
That’s why we created this guide on doing payroll for small businesses. We cover everything from how to set up payroll to what you need to know when the time comes to file taxes, as well as what software you can use to simplify payroll and everything that comes along with it.
Step #1: Understand payroll laws and regulations
Often, it’s not just the physical act of running payroll that eats into your day — it’s figuring out the complex rules and regulations behind the process that takes up so much time.
Following payroll laws and regulations is essential to avoid serious legal and financial consequences, so it’s important to do things right. And that can mean keeping track of lots of moving parts — think local, state, and federal tax regulations, as well as wage and hour laws.
For example, each state has unique payday requirements, and failure to follow them can mean dealing with fines or even legal action.
You also need to correctly classify staff members as exempt or non-exempt, which will determine whether they’re eligible for overtime pay and other Fair Labor Standards Act (FLSA) protections.
That’s not to mention accurately determining whether workers are independent contractors or employees. Up to a third of employers misclassify staff as independent contractors, a mistake which can cost hundreds, even thousands, in penalties.
Learning and staying up to date with all these regulations may feel like a whole job in itself. That’s why we recommend using a tool like Homebase HR and compliance, which can track all your employee hours in one place and help you stay on top of wage and hour laws, especially when it comes to breaks and overtime.
Our platform can also notify you when labor laws change at the state or federal level, and our team of HR Pros is always there to review your procedures and give you advice when you’re feeling lost.
Step #2: Set up payroll systems
Once you have a general understanding of the laws and regulations you need to follow, it’s time to record your business with the government. That means registering your business name with local and state governments and applying for your tax ID, or employer identification number (EIN).
But one of the most important steps when doing payroll for your small business is selecting and setting up your payroll system. And choosing a manual process can be tricky as it can mean hours of extra work and costly mistakes.
So, look for payroll software that makes your job easier while helping you maintain accurate and efficient payment systems. Some features to look for include:
- Instant conversion of timesheets into hours and wages so they’re ready for payroll
- Automatic tax filing and issuing of W-2s and 1099s
- Automatic issuing of payments to employees, the state, and the Internal Revenue Service (IRS)
- Self-onboarding and document e-signing for employees
- Time card record storage for compliance with the FLSA’s record-keeping rules
Essentially, you want a payroll system that lets you pay employees and file taxes with the click of a button. The system should also be smooth to implement and easy for staff to use on autopilot.
And ideally, choose a tool that offers other HR features, like hiring and onboarding and team communication, so you can keep all your main internal processes under one roof.
Step #3: Calculate payroll
Now that you know how to set up payroll, it’s time to get on with your calculations. That means determining gross pay, estimating taxes, and making pre-tax deductions for things like 401(k) plans and health insurance.
Figuring out payroll taxes can be complex, but when you use software like Homebase, the tool can automatically calculate, pay, and file for you. Our platform is designed for hourly teams with unique pay rates and exemptions, and it’s suitable for businesses in just about any industry.
Caption: Homebase can give you a clear overview of what each employee is making and what portion of your total payroll goes to taxes.
Homebase payroll also lets you set roles, wages, and employee classification for each of your team members and allows you to run payroll for your whole team with just a couple of clicks.
Caption: Homebase lets you set unique wages, roles, and payroll classifications for each employee.
Plus, using a comprehensive tool like Homebase takes the stress out of making sure you’re complying with laws and regulations and helps you avoid over or underpaying your employees.
Step #4: Pay employees
Now, it’s time for your team’s favorite part of this whole process — payday! And with 50% of workers reporting they’d consider quitting their job as a result of repeated payroll mistakes, making sure the right amount shows up in people’s bank accounts is critical.
Payroll accuracy isn’t just important for maintaining team morale but also for staying compliant with laws and regulations and protecting your business.
But paying team members isn’t just about handing over a check. You need to keep track of preferred payment methods, issue people’s payments via paycheck or direct deposit on time, and distribute the correct tax forms.
Again, automating these processes helps minimize mistakes and reduce your workload.
Caption: The Homebase app notifies employees when they get paid, making it easy for them to view their pay stubs and see exactly how much they made.
Step #5: Keep accurate records
Even once you’ve sent out your payments, your work isn’t done yet. The FLSA requires employers to keep basic records for all their non-exempt employees consisting of correct data about the worker, their hours, and their wages.
Storing accurate records is also important for making informed decisions about payroll. After all, payroll costs can make up as much as half of all your business expenses, depending on the industry you’re in.
And when profit margins are tight, it’s essential to know exactly where your revenue is going. Having detailed payroll records helps you determine whether you’re running your business sustainably.
So, keep in-depth documentation about employee hours and wages, and be sure to store payroll data securely to protect your team members and your business. You don’t want people to worry about their privacy, and you certainly can’t risk that information getting into the wrong hands.
This is another reason why using a comprehensive payroll tool that generates and stores reports is a must — you won’t have to go through the extra work of creating them yourself and will know they’re stored in a safe place.
Caption: Homebase accurately generates and stores payroll reports for you, from comprehensive summaries to W-2 previews.
Step #6: Manage payroll taxes
It’s a fact of life: “nothing is certain except death and taxes.” We’re sure you already know how important it is to stay on top of your payroll taxes to stay compliant with laws and regulations and avoid penalties and late fees.
And while no one can get out of taxes, Benjamin Franklin didn’t have to be so morbid about the topic. When properly managed, payroll taxes don’t have to be such a hassle.
Managing your payroll taxes means:
- Establishing who your taxable workers are
- Identifying which wages are taxable
- Determining which payroll taxes apply to you
- Familiarizing yourself with the forms and procedures for filing taxes
- Submitting quarterly and annual tax reports
Again, we recommend automating this process with a specialized tool that can calculate, pay, and file your taxes for you. Because let’s face it — unless you’re a certified public accountant (CPA), paying taxes can feel like trying to read a foreign language.
And remember, different states have different payroll laws and tax rates, which can be hard to keep up with by yourself. This is where a specialized tool can help you out.
Perfect payroll to send out paychecks on time and keep your business thriving
Now that you’ve read and understood these tips on how to do payroll for a small business, it’s time to put your learnings into practice. Follow the above steps for how to set up payroll, pay your employees, keep records, and file your taxes to keep your people happy and your business running smoothly.
And remember, you don’t have to take care of payroll alone. Consider using a tool like Homebase payroll to simplify and automate the process and manage all your HR duties in one place.
