A small business does many things differently than a large corporation. For one thing, due to the size and demands of the company, corporations have separate departments to handle administration processes like bookkeeping, budgeting, and inventory management. A small business company owner, however, quickly learns his or her limitations in time and resources, especially for functions with many moving parts like small business payroll.

Each year, the Internal Revenue Service (IRS) issues a penalty to one out of every three businesses for payroll errors, according to the Inc. website. A common problem that cuts deep into the bottom line for small business owners who could have avoided these problems by using payroll services.

Payroll is a time-consuming process, and rushing through it could mean data entry errors and incorrect tax and salary calculations – either costing the business what could be profit or opening it up to liability by accidentally shorting employee pay. Consider the benefits of hiring a service for your small business payroll, and get some tips for finding the right type of service for your small business.

In this guide, we’ll answer your questions like “how does payroll work for a small business?” and “why do small businesses need payroll processes?”. Keep reading or use the links below to learn more.

What is small business payroll?

Small business payroll refers to all the processes you use to ensure that your employees are paid on time and accurately. This includes both contract and full-time employees. 

So, how does payroll work for a small business? If you run a small business, keeping a close eye on your cash flow is critical. You need to understand how much money you are bringing in, but you also need to understand how much money is going out. Payroll for a small business handles this aspect of your finances.

In some cases, a business owner will handle their own payroll processes. However, more often, they will outsource the responsibilities to experienced professionals. In fact, about 40% of U.S. companies outsource their payroll.

Small business payroll can be challenging, particularly if you have limited resources. However, it’s essential your employees are paid on time for both legal reasons and to ensure you can keep employees.

Does payroll differ for large and small businesses?

Regarding payroll for a small business, there are some notable differences to keep in mind. In most larger companies, the payroll is handled by the HR team. You may not even have a human resources department if you run a small business. 

You are responsible for doing everything on your own. In some cases, you might even pay your employees manually. Some small businesses cut their employees a physical check every pay period.

In a large business, you may have a software program and a dedicated HR department that handles all of your payroll needs. Parts of the process are often automated, so it is very different when compared to the payroll processes of a small business.

Why do small businesses need payroll processes?

Even if you run a small business, you need to have standardized processes to handle your payroll needs. Having set payroll practices will help minimize your chances of making mistakes.

There can be a lot of moving parts. You have many employees at your company, some of whom might be hourly, while others are salaried. You also have to take into account 401K, payroll taxes, overtime, paid time off, and sick days. All of these can impact the amount of money your employees are paid, so you need to have a firm process in place to ensure all of your employees are paid accurately.

When do small businesses need to set up payroll processes?

Generally speaking, you should have a payroll process set up the instant you have to hire an employee. Even if you only have a few employees, you must set up a standardized process to ensure your employees are paid accurately. 

The longer you wait, the more complicated it may become, which can lead to major problems for your business.

Do you need payroll if you only have one employee?

Yes, even if you only have one employee, you should have a payroll process in place. That way, you can make sure your employee is paid accurately and on time. It will also help ensure you withhold enough money in taxes. No matter how new or small your business is, you always keep a paper trail of this information.

What types of payroll information do small businesses need to keep?

You need to keep several important pieces of information as part of your payroll process. This includes employee data, such as:

• Legal names
• Addresses
• Pay rates
• Social security numbers

You also need to keep track of actual payroll records, which should include:

• Amount paid to each employee
• How much money you withhold from each employee
• Tax information

Businesses are required to keep payroll records for at least three years.

Common payroll errors

It isn’t that hard to sit down and calculate payroll basics like salary. Usually the problem is the more complex functions like figuring out the small business payroll taxes. Also look out for health insurance and complications like wage garnishments. These all factor into the small business payroll system.

Misclassifying workers, for example, is a hot-button audit topic for most people responsible for a small business payroll, according to the U.S. Small Business Association. To avoid the complication of doing payroll, some companies might classify their workers as 1099 independent contractors responsible for their own taxes. It seems like an easy way out but the misclassification of an employee as an independent contractor is a serious issue that could dramatically change your business taxes and create problems with the IRS and other government entities.

The IRS will also expect the small business payroll manager to keep detailed records available at any time for review. This includes the trust fund that holds money taken out of an employee’s check for withholding.

Payroll is a huge responsibility and your company is liable for all of it. A small business payroll service can do the legwork for you and will often take on the recordkeeping burden at the same time, even if it means handling an IRS audit, saving you time and closing off liabilities

What are the potential consequences for incorrect small business payroll?

If you do not have a standardized small business payroll processing place, you increase the chances of making mistakes. For example, paychecks are more likely to be late in companies with 20 or fewer employees because many small businesses do not have proper payroll processes in place. 

Additionally, there’s a higher risk of paying your employees incorrectly. Not only will this upset employees and affect morale, but it could present legal issues for your business. The IRS issues several billion dollars in payroll penalties every year, so you need to avoid these penalties by having correct small business payroll practices in place. 

Benefits of using small business payroll services

When you are hiring employees, professional small business payroll services can be very helpful. The right small business payroll service can shield your company from regulatory fines, save you time, and reduce your overhead expenses. 

For many business owners, the peace of mind and convenience of using small business payroll services is well worth the cost.

What to look for in small business payroll services

It doesn’t take long for most small business owners to realize the benefits of having payroll services, but how do you find one?

• Ask around — Referrals are the small business owner’s best friend with it comes to payroll services. Talk to your CPA, vendors and other third-party services to see which service they use and how they’ve handled complicated issues in the past.
• Go online — Once you get a short list together, go online and do some research. Look for customer reviews and see if employees from companies that use this small business payroll service have any complaints. A good payroll service will pay both taxes and employees on time, every time.
• Consider the cost — Look carefully at what you are paying for with each different payroll company. Companies with just one or two employees might do well with a larger service available online. A business that has more complex needs might want a local small business payroll service, though, for more individualized attention. Make sure to take into account any add-ons, too. Some payroll services charge extra for W-2s, direct deposits and online time tracking.
• Consider the convenience factor — What does your business want to get from a payroll service? Do you want online input? Maybe you prefer to send the data to the company and have them input it? What kind of records do you want to see online? What about hard copies and reports? Consider your specific payroll needs, and have these in mind as you shop for a service.

Before picking a small business payroll service

You know that you want to use a payroll service, and you know what you’re looking for—so now what? Before making the final selection, arrange to talk to someone and ask questions like “What happens if the small business payroll service makes a mistake?” “Who is responsible for the following work to fix the issues? What do they do if there is an IRS audit”?, and “Are there any fees you might not know about, like a charge for integrating accounting software?”. Consider a test drive, too. Go through at least one or two pay cycles before signing any long-term contracts.

With your small business payroll handled, you can move on to other pressing issues like finding affordable small business health insurance on eHealth.com.

If you are looking for small business health insurance, eHealth can help you compare and find plans that are within your budget and meet your needs. If you need help navigating the process, we have knowledgeable, licensed insurance agents who can help you make an informed decision. Try our free insurance comparison tool today to get started.

This article is only for general information and is not tax, legal, or accounting advice. Consult your tax, legal, or accounting advisor for guidance.