8 Essential Tips for Small-Business Payroll Management

Payroll is a high-stakes operation. After all, even slight oversights can yield massive lawsuits and labor violations.

This narrow room for error is why many workplaces enforce strict policies. But this isn’t an easy process. It can take time to develop a uniform onboarding process, for example. Still, there are many ways you can make cutting paychecks easier.

Let’s look at eight crucial tips on how to do payroll for a small business.

Jump to:

1. Determine a pay schedule
2. Stick to a payroll budget
3. Know payroll tax deadlines
4. Categorize employees correctly
5. Monitor labor and tax laws
6. Design solid onboarding and offboarding processes
7. Get time-tracking software for hourly staff
8. Review payroll data for each pay period

1. Determine a pay schedule

Generosity alone isn’t the reason workers get paid every week or two. Instead, state laws dictate how frequently employers must cut paychecks.

All 50 U.S. states mandate payments must go out at least once a month. But most states require a more frequent schedule of twice a month or more. Moreover, some locales dictate different payroll frequencies depending on the nature of an employee’s work.

For example, New York mandates weekly payments for manual labor workers. Yet, clerical staffers may get paid only twice a month. California, New Hampshire and Texas, among other states, also have complicated pay schedule laws.

These diverse regulations mean you must develop a strict payroll schedule. You’ll also need to adhere to different timeframes for each employee classification. Failure to adhere to these laws can rapidly invoke a costly lawsuit.

2. Stick to a payroll budget

Once you’ve figured out when to pay folks, you must determine how much cash to dish out. This process involves traditional budgeting.

Say you need to hire five new employees. You’ll want to determine how much money you can spend on labor for the next six to 12 months. Then you can assign each of the five new positions an appropriate salary.

Of course, this also involves researching the market rate for the talent you need. Paying minimum wage to a highly skilled engineer won’t work. So remember to do your homework to avoid declined job offers (and wasted time).

SEE: Best Cheap Payroll Services for 2023

3. Know payroll tax deadlines

Death and taxes are life’s only certainties. Oh, and so are penalties for missing taxes.

As a result, you’ll need to plan for state and federal tax deadlines. Many businesses must pay both annually and quarterly. Regardless, this process involves more than marking a date on the calendar. You’ll also need to budget so you can afford to pay the required sum.

The IRS sometimes requires monetary deposits throughout the year to keep small business owners on track. The federal agency holds on to this money so you don’t fall short when taxes are due.

Bottom line, nail down when state and federal payroll taxes are due and budget accordingly.

4. Categorize employees correctly

Many companies, such as ridesharing service Uber, have received criticism for treating contractors like employees. These accusations have spawned multimillion-dollar lawsuits and plenty of bad publicity.

No matter your stance on the issue, these legal woes illustrate the importance of proper employee classification. For example, independent contractors using an IRS 1099 form often contend they’re more akin to an employee. This contention is the root of many labor disputes and laws, such as California’s AB-5 law.

To dodge legal troubles, consult with an attorney to honestly assess staffers’ categorization. Although W-2 employees often cost more than contractors, proper classification is cheaper long-term than expensive lawsuits.

5. Monitor labor and tax laws

Once you’ve appropriately categorized workers, you must ensure compliant working conditions. These regulations address rest breaks, safety equipment and overtime pay, among other issues. And many items overlap with how an employee is paid.

Much like other mandates, the details vary from state to state. Some states, like California, require 30-minute meal breaks in a long shift. Other states, like West Virginia, only need a 20-minute lunch. In terms of paychecks, some locales require this time happens on the clock.

Safety gear and uniforms also affect pay. If you require uniforms, you may need to reimburse staffers for these clothing items. The same goes for protective equipment. Clearly, payroll includes much more than simply hourly wages.

In short, carefully analyze your state’s labor laws to build a compliant workplace. And make sure to budget for these mandated items, like rest breaks and equipment. If you need help, look into the best payroll software titles to assist you.

6. Design solid onboarding and offboarding processes

Indeed, there are a lot of legal requirements to remember. But your employees must understand these topics too.

As a result, you’ll need to develop a rock-solid process for hiring (onboarding) and terminating (offboarding) workers. These processes should clearly spell out requirements for staffers and managers. For example, managers need to know administrative steps for offboarding an employee to ensure records are accurate and proper steps are taken — so it’s clear when an exiting employee will receive their last paycheck and when their benefits will end.

Many employers compile policies in a binder or digital format. Some put together trainings or set up an internal contact as a consistent point person. No matter how you inform folks, have people sign any applicable forms to defend your business against legal issues.

7. Get time-tracking software for hourly staff

You’ll need time-tracking software to manage time clock punches if you employ many hourly employees. These digital tools can log a work shift down to the second. Plus, advanced software can help you unearth fraud, stay on top of tax deadlines and even automatically cut paychecks, among other nifty perks.

Some popular software titles include OnPay, QuickBooks Payroll and Gusto. There are also options specialized for specific industries. For example, 7shifts is a favorite among restaurants.

8. Review payroll data for each pay period

Nobody’s perfect — and that includes workers. With this in mind, payroll errors are inevitable. Some are innocent, like a person forgetting to clock in. Yet others are more sinister, like people logging more hours than they actually worked.

These occurrences are why you must audit every pay period. Even one accidentally duplicated shift can result in significant losses over time.

If these audits seem too time-consuming, consider hiring a part-time payroll or human resources administrator. The errors they catch are likely to make their role pay for itself.

Set your payroll up for success

Running payroll is a heavily regulated process. Disobeying labor laws or cutting paychecks too late can result in stiff consequences. To help dodge issues, continuously monitor new rules in the states your business operates. And develop rigid in-house policies to ensure a compliant, reliable payroll process.

Don’t worry if this seems like a lot to tackle. Payroll software, such as ADP, can help you stay on top of things. If you’re looking for a solid payroll solution, take a look at our favorites for small business payroll software.