New to Payroll Management? Here’s Your Getting Started Guide
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Only 60% of US employees are confident they receive accurate pay from their employers, especially small businesses. Companies with 20 or fewer employees are more likely to be late with paychecks or have more payroll errors than bigger businesses.
Usually, inaccurate wages and late payments stem from a poor or non-existent payroll management system.
If you just hired your first employees or find yourself outgrowing manual payroll, you may not know where to start. In this guide, you’ll learn how a payroll management system can benefit you and how to set up and process accurate, efficient payroll.
What is payroll management?
Payroll management refers to the complex process of administering your employees’ financial records, including salaries, benefits, taxes, and deductions. Payroll management involves calculating your employees’ wages, making payments, keeping payroll records, and collecting tax forms.
Businesses manage payroll in many ways: manually, with spreadsheets, or automatically via payroll software. Some companies outsource payroll to payroll experts like employers of record (EORs) or professional employer organizations (PEOs).
5 reasons to use payroll automation for your business
A quarter of US companies still use the pen-and-paper method to manage their payroll. Manual payroll may make sense when you have one employee, but you risk making a simple but expensive mistake during data entry and calculation.
Most companies opt for payroll automation—here are the main reasons.
Accurately manage your business's finances
Payroll automation reduces payroll processing errors, which can have many negative consequences: employee dissatisfaction, costly fines, and even legal issues.
Payroll software accurately calculates wages and deductions, and you only need to enter employee data once into the system. You can also integrate the software with other tools you use for HR management or communication to sync data across platforms.
Additionally, most payroll software solutions allow you to keep payroll records electronically, which is safer and more organized than physical copies.
Spend less time and money on managing payroll
Payroll automation reduces the hours and effort spent preparing payroll every pay period.
A Quickbooks survey showed small business owners typically find payroll management complicated and frustrating. They often underestimate the time required to process their payroll and spend around five hours doing it every payday.
With payroll software, you don’t need to do any calculations. The app does calculations for you, so you can spend less time paying wages and filing taxes.
Avoid late payments or errors
After two payment-related issues, 49% of workers will start updating their resumes to look for new jobs. Avoiding late payments and errors is critical for keeping your employees happy.
According to the National Payroll Week survey, many US residents live paycheck-to-paycheck and almost run out of money every week.
Late payments could cause issues for your employees and have a detrimental effect on their employee experience, increasing employee turnover. Finding replacements and training them from scratch costs way more than investing in payroll software that helps you provide accurate, on-time payments.
Automatically calculate taxes to avoid issues with the IRS
Business owners who fail to file payroll taxes on time can face hefty fines, interest on back taxes, and even criminal charges from the IRS.
These fines are easily avoidable with payroll software that automatically collects employee tax information, calculates payroll taxes, and files them with the IRS. Most software offers alerts that remind you to complete your taxes on time.
Keep sensitive data safe
Keeping your payroll records and employee data in a cabinet isn’t safe, even if the cabinet is locked. Payroll software offers several protection layers that keep your payroll data safe from unauthorized access.
These protection options include storing data in a cloud, encryption, and multi-factor authentication, just to name a few.
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Phases of the payroll management process
Payroll processing involves more than spending money. You have to prepare, process, and organize in three phases: pre-payroll, payroll processing, and post-payroll.
1. Pre-payroll phase
In the pre-payroll phase, you collect and verify payroll information, such as employee timesheets and taxpayer information. For each employee, you input information like:
- Hours worked
- Bonuses earned
- Changes in salary
- Deductions and benefits
- Changes to personal or tax information
Once you collect and input this information, you’re ready to calculate and run payroll.
2. Payroll processing phase
During payroll processing, you calculate your employees’ gross pay (based on the number of hours worked and other bonuses, without withholding taxes). Then, you withhold (or take out) the employee’s contribution to benefits from their paychecks. Once you make these deductions, you’ll have your workers’ net pay, which you distribute to your team.
3. Post-payroll phase
Post-payroll involves organization and record keeping. At this stage, you resolve any issues with payslips, store your payroll records, and make any changes to employee data or tax forms before you run payroll for the next pay period.
Tasks involved in payroll management
As mentioned, a company manages several payroll tasks throughout the three phases.
Employee wage calculation
Employee wage calculation is crucial for payroll processing as you must ensure all your employees receive the correct amount of money. Your salaried employees will receive the same paycheck every month, but hourly employees will receive different amounts depending on how much they work. For hourly (or non-exempt) employees, you must also calculate and pay overtime wages.
Time and attendance software helps streamline payroll administration and calculations.
Payroll tax processing
Tax withholding comes right after gross pay calculations. Tax deductions include mandatory employment taxes, such as medicare, social security, and unemployment taxes. It also includes tax payments for voluntary deductions, such as retirement plan contributions.
Also, if your employee owes money to the IRS or for child support, you may need to deduct wage garnishments at this point to ensure the employee’s paycheck goes toward the mandated debt payment.
Sending payments to employees
After deductions, employers make payments to their employees using a variety of payment methods. Payment methods include direct deposits to an employee’s bank account, pre-loaded debit cards, cryptocurrency, and digital wallets.
Sending payments may become more complicated depending on your team’s location—especially if you’re sending payments across the globe.
Providing pay stubs
Pay stubs contain information about the breakdown of employee payments. Your employees need pay stubs to understand withholdings from their paychecks and make correct calculations when filing taxes during tax season.
You can secure payroll records physically, but payroll software allows you to keep documents safe and organized.
10 tips for efficient and accurate payroll management
As your business grows, your payroll tasks will become more complex, repetitive, and frustrating. The sooner you set up an efficient and scalable payroll management system, the easier it will be to adapt it to your growing workforce and business needs.
1. Set aside enough time for payroll each pay period
Make sure you have enough days in advance to review employee tax documentation, hours worked, and other information relevant to your payroll.
Business owners may spend up to five hours calculating their employee wages and taxes before each payday. Even more, if they pay their employees weekly or biweekly. If you set aside enough time to prepare payroll properly, you have fewer mistakes and delays than you would rushing through it at the last minute.
2. Set payroll calendar alerts
Create a payroll calendar in Google Calendar to notify you a few days before important payroll dates, such as payday and tax deadlines.
Set up each alert to give you enough time to complete the task. Once it’s in the calendar, you don’t have to spend the whole month or year—keep it out of mind until you get the alert. As your team grows, you can share this calendar with your employees to nurture transparency and let them know when they’ll get paid.
3. Document your payroll processes
Documenting all your payroll management processes in a handbook allows you to audit your process from time to time and scan for improvements. It also helps you onboard new payroll managers more easily, should you ever hand off the task.
4. Provide employee training about payroll
Payroll automation software progresses every day, and your payroll staff (or you, if you run a one-person business) should keep up with the newest trends and best payroll practices. Provide employee training to enhance collaboration among team members, help them automate repetitive tasks, and broaden their knowledge about running payroll.
And if you’re the only employee who manages payroll, set aside time to explain how payroll works to your employees and let them know the importance of submitting their hours and documents on time if they want to get paid.
5. Plan for additional payments
When setting a budget and planning payroll, don’t forget about additional payments you may make, such as end-of-year bonuses.
Payroll doesn’t only refer to salary and wages but also other types of employee compensation like commissions, bonuses, reimbursements, and 13th-month pay. Avoid accounting for these additional payments last minute, and make sure the payment date is within the current tax year so you can adjust your employee’s income tax on tax forms appropriately.
6. Update employee data regularly
Employee data may change over time—last names, addresses, hourly wages, etc. You should schedule regular data revisions (or ask employees to check their information) to ensure everything is up to date.
Making corrections after making payments is possible, but it takes a lot of time and can be an unexpected cost for your business. You should also confirm employee data, such as addresses and taxpayer identification numbers (TINs) with your employees before filing tax forms with the IRS.
7. Choose scalable software
Choose a payroll solution that fits your current business needs as well as your future and potential growth.
Scalable software means you won’t need to switch to a new payroll service as your team grows. Settling with one payroll solution and then moving to another means new training sessions, set up, potential data security issues, and processes.
8. Ask employees for feedback
Ask employees for feedback to understand whether your payroll process is straightforward. Don’t make assumptions about your employee’s feelings about payroll, especially considering how frequently employees leave when they don’t feel confident in their employer’s ability to pay.
Asking for feedback may prompt you to provide additional training about payroll. It may also help you develop new ways to optimize the payroll process.
9. Outsource payroll service
Outsource payroll to a payroll service provider or an employer of record to save time, ensure compliance, and have one task less on your plate.
The number of companies outsourcing payroll services is growing and for a good reason. Outsourcing payroll costs less than hiring full-time employees to handle it, and you usually get access to payroll software and professional support from payroll experts.
10. Ask your in-country provider (ICP) for advice
If you have a global team and outsource payroll to in-country payroll service providers, ask your chosen ICP for advice as they’re familiar with the best practices in different countries. Most vendors don’t offer specific advice unless you ask them about it.
Being familiar with the regulations from the tax authorities can save money for the employee or employer, as certain payments may be provided tax-free or free from social insurance contributions.
For example, in Poland, social security contributions for some employees decrease substantially after you reach the annual limit for pension and disability insurance basis. So does employer cost, but non-Polish employers may not be aware.
What to look for in payroll management software
Even if you have never used payroll software before, hunting for a full-service payroll solution shouldn’t feel like guesswork. Here are payroll software features to prioritize:
- Scalability: The software provides a simple solution for handling payroll with five or 5000 employees
- Support: The software provides access to expert advice and customer support available 24/7
- A variety of payment options: The software offers your workers different payment methods, such as direct deposit, pay cards, cryptocurrency, etc.
- Data protection: The software offers data encryption, multi-factor authentication, and compliance with GDPR, especially if you hire overseas
- Self-service: The software offers self-service payroll functions to let your employees enter their hours and change their information, removing tasks from your list
- Global payroll: The software offers global payroll options, especially if you want to hire international employees
How to do global payroll management
Global payroll is a payroll system that lets you make international payments to your foreign employees. It’s different from running local payroll because you need to apply federal tax regulations and employment laws which vary by country.
If you decide to hire overseas, you have several ways to run payroll:
- You can hire independent contractors and let them handle their taxes. This way, you only need to pay the workers instead of complying with local labor laws regarding mandatory employee benefits, minimum wages, etc.
- Use employer of record (EOR) services and outsource the whole payroll and hiring process. EORs are a safe way to hire international employees while ensuring full compliance, data safety, and a streamlined payroll process.
- Open a foreign subsidiary and work with an ICP. This way, you get access to local expertise and don’t have to worry about potential law changes, as you have someone to be on top of it at all times.
Learn more in detail about running global payroll in our ultimate guide.
FAQs about payroll management
Find more answers in our FAQs about the payroll management section.
What are the responsibilities of a payroll manager?
A payroll manager consolidates employee data collected from time-tracking software and tax forms before payday to ensure everything is entered correctly into the payroll software.
The manager needs to process all payments correctly and compliantly, maintain payroll records, and create payroll reports. They are also in charge of hiring, training, and supervising new staff on their team.
What's the difference between HR and payroll?
Payroll is just one of the tasks an HR department may manage. It refers to the payments made to employees for their work.
Human resources also handles tasks including recruiting, hiring, onboarding, contracts, providing training for employees, organizing team-building events, and strengthening company culture. In larger companies, payroll and HR departments are usually two separate departments.
How do I prepare payroll for my employees?
To prepare payroll for your employees, you should:
- Get an Employer Identification Number (EIN)
- Collect Forms W-4 from employees and ensure all the information is correct
- Choose a suitable payroll schedule
- Collect the data from your time-tracking system to calculate the wages
- Withhold taxes from your employees’ paychecks
- Send your employees Form W-2 in January
Read a more in-depth guide on running payroll for small businesses.
What is full-cycle payroll processing?
Full-cycle payroll processing refers to processing your complete payroll between two paydays. The length of your full-cycle payroll will depend on the schedule you choose. This schedule is also called pay frequency.
Most companies pay their employees bi-weekly. Other common choices for payroll schedules are monthly, semi-monthly, and weekly schedules.
Manage your (global) payroll hassle-free with Deel
Payroll management is mission-critical. Setting up a strong payroll ensures accurate business finances, compliance with the local or international labor laws, and a positive employee experience.
Managing payroll comes with its share of challenges, but if you plan timely, automate repetitive tasks, and review the process frequently, you’re on the right track to handle your payroll like a pro.
However, if you want to outsource this task and hand over the burden to experts, we’re here for you. With Deel, you can effortlessly manage your complete local and global payroll in one platform, pay employees and contractors in a single click and rest assured you’re fully compliant with all applicable tax regulations and employment laws.
Want to know more about how Deel works? Speak to one of our experts today.