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Managing payroll is a must-do for businesses of all sizes that have employees, and it’s even a consideration for those who work with freelancers or independent contractors. It can mean wading into a world of payroll terms and tax obligations you may be getting familiar with for the first time. From learning acronyms like FICA and FUTA to wrapping your head around withholding taxes, some employers may feel a little uneasy when getting started.
Key takeaways about managing payroll
- It’s a method that is repeatable, so employers can accurately calculate employee wages, including regular pay, overtime, bonuses, and required withholding taxes
- It typically includes a plan to maintain detailed payroll records and ensure compliance with federal, state, and local laws
- Companies must decide who will manage payroll — yourself, an in-house team, or outsource those tasks to a provider
- It’s important to establish a consistent pay schedule and method for distributing wages (direct deposit, checks, etc.)
However, with some planning, you can manage this process yourself, hire an outside company, or hire a team to do it for you. Even if you have payroll specialists on staff or plan to outsource this task, it’s still a good idea to know what it means to manage payroll, how this affects your employees, and how it can tie into other facets of your organization (such as offering employee benefits).
In this overview, we’ll discuss some payroll basics,relevant federal and state taxes, and point you in the direction of other resources to help you tackle this topic.
Why is managing payroll a must-do for most businesses?
If you are first becoming familiar with how paying employees works, let’s briefly touch on some reasons why having a system in place is a good idea.
Reduce risks and errors
Keep employees happy and paid on time. Many companies use payroll software as part of the management process. Because many of the calculations are automated, it lessens the chance of wages being miscalculated or employee payments not getting made. Some providers can also help make sure that important payroll forms, such as Form 941 which are filed each quarter, and Form 940 which is filed on time at the end of each year.
Reputation
The reality is that with the advent of review sites such as Indeed and Glassdoor, with a few clicks, current (and former) employees can easily post about their experience working for a company. Making errors (even if they are unintentional) with deductions for benefits or paying employees late can lead to online postings that are easily avoided with some systems in place.
Reporting you can rely on
What is one of the other benefits of buttoning up a process? You can take care of getting records under control in the event that Uncle Sam ever comes knocking on your door for an audit. Though unlikely, you’ll need to have wage information available, the taxes you paid and withheld. Part of getting management in place is getting a records system in place. Many tools or software platforms automatically record and keep track of when people are getting paid.
Tax compliance
When you manage payroll, paying employees comes with certain tax obligations, and it’s important to keep up with them all.
FICA familiarity
- Both the employer and the employee are responsible for paying FICA taxes. These taxes are under the Federal Insurance Contributions Act (FICA) and consist of old-age, survivors, and disability insurance taxes, commonly known as Social Security taxes.
- It also includes hospital insurance taxes, though most employees will be more familiar with the term Medicare taxes. Here is how the numbers work out:
- The current tax rate for Social Security is 6.2% each for employer and employee, up to the annual wage base limit.
- For Medicare, it is 1.45% each for employer and employee, which has no wage base limit.
Employees contribute a percentage of their gross wages to these taxes, and employers then match the FICA taxes that are paid by their employees.
Foundations of FUTA
- The Federal Unemployment Tax Act (FUTA) payments help fund unemployment for workers who have lost their jobs — it is a tax paid solely by employers.
- Employers pay 6% of the first $7,000 of each employee’s wages. However, employers typically receive a credit for paying state unemployment taxes, commonly reducing the effective FUTA rate to 0.6% most of the time. To learn more about the purpose of this tax, here is our FUTA guide.
State and local taxes
- Employers may also be responsible for state and local payroll taxes (in addition to the federal tax mentioned above).
- These will likely include state unemployment insurance, disability insurance, and income taxes (depending on regulations where your business is located).
The takeaway is that when you manage this process, you need to take care of the different payroll taxes you’re responsible for.
What does it mean to manage payroll?
Simply put, payroll management is a process that employers use to ensure that employees are paid the correct wages while also complying with various legal and tax obligations. This includes everything from calculating wages and withholding taxes, to maintaining accurate records and submitting required filings.
Bookkeeper’s corner
To help you understand what you will need to bring to the table and how much time is involved in payroll management, we spoke with Billie Anne Grigg, one of OnPay’s expert content contributors (and Chief Pocket Protector at Pocket Protector Bookkeeping).
Is payroll management hard?
“Payroll management isn’t hard, per se, but it does require good organizational skills. In my experience, below are just a few of the things you have to keep track of.”
— Billie Anne Grigg
Here’s some of the main elements to keep in mind, per Billie Anne.
- Payroll schedules. There’s more to it than “payday is on Friday.” If you offer direct deposit – a benefit most employees desire – in most cases you will need at least two business days’ lead time to review timesheets, make corrections, and submit the payroll. Throw in a bank holiday (or even weekends) and it can seem like you’re always doing payroll.
- Tax deposit deadlines. The tax deposit deadlines for payroll shift as your liability increases. You might start out as a monthly depositor – meaning your payroll taxes are due on the 15th day of the following month – but as you hire more employees you will be responsible for depositing more taxes. You could quickly find yourself shifting to the semi-weekly depositor schedule – meaning your payroll tax deposits become due either the Wednesday or the Friday of the week following payroll – or even next-day deposits.
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Pro tip from Billie Anne
Keep in mind that’s just at the federal level. You will also need to keep in mind state tax deposit deadlines, although the good news is that most states follow the federal depositor guidelines.
- Benefits payments. When you’re first starting out with employees – or if you rely on independent contractors or freelancers – benefits payments aren’t an immediate concern. However, health insurance, flexibile spending accounts, and retirement benefits become nearly non-negotiable as you look to attract new talent to your company. And with those benefits come additional requirements to manage deductions from your employees’ paychecks correctly.
Can payroll be stressful?
It’s a question that comes up occasionally. Once more we spoke with Billie Anne for her take.
“Assuming cash flow isn’t an issue for your company, the most stressful thing about payroll is keeping up with the schedules outlined above,” she explains. “Nothing sends an employee to social media or other business review sites than frequent mismanagement of payroll…especially if that mismanagement results in them not getting paid on time and causes a financial hardship for them.”
But if anything ever comes up, there’s likely resources available and individuals who understand that mishaps can happen.
“Beyond that, staying in compliance with tax and reporting requirements does take a bit of time and energy, but there is ample guidance available to help you with this,” says Billie Anne. “And if you do make a mistake, the IRS and most state agencies are willing to grant some forgiveness, provided you don’t make a habit if it.”
Managing payroll primer: these are the essentials
Managing payroll covers a lot of territory, but here are the minimum main tenets that most employers have in place.
- Calculating employee wages: Including regular pay, overtime, bonuses, and other compensation. At this point we’re adding up all the gross wages — all the dollars people have earned before deducting anything — meaning the money that typically goes into payroll taxes.
- Withholding taxes: As an employer you’re responsible for making sure federal, state, local, and other deductions like Social Security and Medicare are withheld during each pay cycle.
- Maintaining records: Keeping detailed records of every payroll transaction. You can keep these records as hard copies or digitally, but you should have a process. There are federal agencies such as the Internal Revenue Service that require businesses to hold onto these documents in the event that a company is audited.
- Compliance: Ensuring adherence to all relevant laws and regulations.
Now that we better understand what it means to manage payroll and generally what it entails, let’s find out who actually takes on this role at a company.
Who manages payroll?
Here are some ways that businesses handle this responsibility. Once again, we caught up with Billie Anne Grigg to share her thoughts on taking the DIY route for business owners that prefer to handle this task themselves.
Can I manage my own payroll?
Yes, you absolutely can manage your own payroll, but you must use payroll software…even if you only have one employee. And you must also have a working understanding of payroll regulations such as the minimum frequency of payroll (some states require weekly payroll for certain jobs) and payroll tax requirements.
— Billie Anne Grigg, Bookkeeper
How much time and energy should they expect to spend each month?
“The amount of time and energy you spend on payroll each month depends on a few factors,” says Billie Anne.
- Number of employees and how they are paid. The payroll for one salaried employee will take far less time and energy to manage than the payroll for 10 hourly employees who sometimes earn overtime pay.
- The software you use. Use the most robust software you can afford. Not what you want to pay, but what your business’s cash flow can cover. The time and energy you save using a robust and reliable solution will more than cover the expense.
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Pro tip
Avoid the temptation to just put your entire staff on salary to make payroll simple. The Department of Labor has some pretty strict rules on who can and cannot be considered exempt from overtime wages, and most of your staff will fall into the non-exempt category. This means you will still have to track their time and pay overtime as it is earned.
- How you track time for your non-exempt workers. Time tracking is another area where you want to use the most robust system your business’s cash flow can cover. An electronic time tracking system that calculates total time worked and overtime hours will cost more than the timeclock and timecards you can purchase at the office supply store; however, validating the data from the electronic time tracking system takes minutes, whereas calculating time from manual timecards could easily take hours.
- If you invest in the proper software and systems, payroll can be managed in minutes per month with very little effort. If you decide to “bootstrap” it, though, plan on this function taking at least two hours per payroll period…and that’s if you have a staff of three people.
Who usually manages a company’s payroll?
In larger companies, payroll is typically managed by the HR department or a dedicated payroll administrator. In smaller businesses, the owner or a trusted employee often takes on this responsibility. It depends on how much bandwidth a company has, or if they have someone on staff that takes this role.
HR sometimes helps here
In many organizations, HR handles payroll. Some of their responsibilities align with other administrative work that comes with bringing on new hires, such as making sure that employees complete Form W-4 and their I-9 forms. However, some businesses may have a separate finance or accounting team that manages payroll.
External assistance
Some companies go a different route by working with an outside company. This could be accounting professionals in your community, a CPA that you trust, or payroll service providers that make this their sole offering. In a small business market survey that OnPay conducted, almost a quarter of the participants we reached out to said they work with an accountant for payroll runs.
PEOs
Another option for those who may not have an interest in managing this in-house is using a professional employer organization (PEO). PEOs can partner with employers to handle the heavy lifting. These companies help with tasks such as:
- Calculating wages and withholding employee taxes
- Making mandatory and voluntary deductions
- Depositing employee and employer taxes
- Issuing Form W-2s and 1099s at the end of the year
- Maintaining payroll records
This is another service that you pay for and outsource. In addition, some PEOs can also help with benefits administration for employers who want to set up an employee plan.
Now that we better understand who you can turn to when running payroll, let’s cover an overview of the different items that need to be taken care of when it’s time to manage it all.
Step-by-step guide on how to manage payroll
Even though there are many moving parts, here’s an overview of what to expect.
Get your employer identification number (EIN) in order
Applying for and obtaining an EIN is essential for reporting taxes and other documentation to the IRS. It’s something you are going to want to take care of before hiring employees. This ID number is putting an official stamp on your business venture. You’ll need it for opening bank accounts.
Related resource: Read more about what an EIN is
After your EIN
On the same subject, once you have obtained your EIN, you’re ready to pay tax obligations to Uncle Sam. The Department of the Treasury has a no-cost, online system that you can use to pay some of the payroll taxes we covered earlier in the article. By registering with the Electronic Federal Tax Payment System or EFTPS online, you can remit all of your federal taxes in one place.
Related resource: Here’s a definition of EFTPS from our payroll glossary
Put a payroll policy in place
Having a payroll policy can be a good way to document what employees should expect each payday and be included in your employee handbook (for reference if questions come up or there are disputes). A payroll policy is a document that outlines how your company handles timesheets, how you pay your employees, how deductions are managed, what employees need to do if they find that there’s a mistake on a paycheck, and what your payroll schedule looks like — we’ll dive into common pay periods in the next section.
Related resource: What is a payroll policy?
Figure out your pay schedule (and how wages get paid)
When bringing on new hires, it’s common for employees to want to know when payday is. So, when you manage payroll, you’ll need to decide how often employees will be paid (weekly, bi-weekly, monthly, semi-monthly, etc.) and stick to the schedule.
Here are some of the most common periods that companies adopt.
Weekly pay schedule
- What does it cover? This schedule covers 52 pay periods during the year, one for each week.
Biweekly pay
- What does it cover? A biweekly pay period refers to a payment schedule in which employees receive their wages every two weeks, typically resulting in 26 pay periods in a year.
Semimonthly (or bimonthly) pay
- What does it cover? This schedule covers 24 pay periods each year. A semimonthly pay period is a schedule in which employees are paid twice a month, typically on the 15th and the last day of the month. This differs from a biweekly pay period, which occurs every two weeks on a consistent day of the week.
Monthly pay schedule
- This is another option which covers 12 payments a year.
If you’re wondering which one makes the most sense for your situation, and are unsure which to pick, it could be helpful to know what other small businesses use. In a survey we conducted, OnPay found that most end up using either:
- Weekly
- or biweekly schedules
What else? You’ll need to figure out how wages get distributed to your employees. The most common methods to pick from are direct deposit or distributing paper checks. But there are also some companies that use pay cards and others even use cash. However, this last option can be a little risky. It’s hard to keep track of (and you’re going to need to have payroll records to maintain – we talk more about this further in the article), and there’s not much you can do should money get misplaced.
Related resource: Picking a pay period
Stay up to date on state, local, and federal taxes
To stay in good standing with Uncle Sam, and where you do business, it’s important to have a system in place for remitting any payroll taxes that you owe. We mentioned some basics earlier in the article, but the topic is worth revisiting.
- FICA (Federal Insurance Contributions Act) is a federal payroll tax — not a state or local tax. It funds programs such as Social Security and Medicare. Employers and employees both pay a percentage of wages toward FICA taxes.
- FUTA (Federal Unemployment Tax Act) is a federal payroll tax, not a state or local tax. It is paid solely by employers to fund unemployment benefits for workers who lose their jobs. The FUTA tax rate is 6% on the first $7,000 of each employee’s wages, though employers can claim a credit of up to 5.4% for paid state unemployment taxes.
- Also, it’s commonplace for each state to have payroll taxes that employers are responsible for. State income tax withholding is required in most states, with rates varying from state to state. All states are going to have a state unemployment tax (SUTA) that employers must pay to fund state unemployment programs. Some states and localities also have tax obligations for items such as disability insurance and programs like paid family leave.
Even if you are not managing payroll yourself, it can be a good idea to know the basics of the rules under which you do business, and the payroll taxes you are responsible for.
Related resource: Payroll calculator and tax information
Time tracking for schedules
Using time tracking can also come in handy for correctly calculating wages. There are many standalone platforms that employers can use to manage this process, while companies like OnPay have integrations so you can set this up in one place. Time tracking can also help you collect data so that you can find potential scheduling inefficiencies. For example, you may find your weekend shifts are overstaffed after reviewing the data.
Related resource: Time tracking guide
Balance benefits and deductions
Most employers will use employee benefits during the recruiting process. From paid time off to group health insurance, perks can put you a step ahead of competitors when vying for the same talent. Remember, though, that you’ll need to make sure that deductions and withholdings are taken care of (which means you’ll need to know how much to deduct for employee benefits each pay period). For example, you’ll want to be sure that pre-tax deductions, like health insurance or flexible spending accounts, are set up before payroll is run. Most companies will use benefit administration systems to keep all of the data and deductions organized.
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Managing payroll can also include employee perks
When it comes to general employee benefits, over half provide workers’ compensation insurance, followed by a third of SMBs offering a retirement savings plan.
Also consider that having a workers’ compensation policy is likely a requirement where you do business (unless you are in Texas or South Dakota, though it is highly recommended that you have it). To manage this, you can sync up payroll, so that you pay premiums based on how many employees you have with pay-as-you-go workers’ compensation. When managing it all, the takeaway is that benefits and some required insurance should be something to think about.
Related resource: Benefits employees want the most
Consider hiring a payroll administrator
If managing payroll becomes too complex, hiring a specialist can save you time and reduce the risk of errors. We mentioned earlier that some owners handle this task on their own or bring on a dedicated specialist. Some of these professionals must earn certifications where they put their skills to the test.
Related resource: What is a certified payroll professional (CPP)
Payroll records are important
Earlier in the article, we touched on the fact that one of the main tenets of managing payroll is also keeping records. To stay compliant (and to have a backup in the event any workers have questions), maintain all of your payroll transactions, including employee hours, wages, tax withholdings, and benefits. This is more than just housekeeping, though. In some cases, you may need to have these documents available should your business be subject to an IRS audit. For more information on the different rules, we have a guide, plus some tips on how to keep it all organized.
Related resource: Payroll records retention employer’s guide
Audit payroll management throughout the year
Think of audits as a way to ensure that your processes are in good health. Payroll audits help ensure accuracy in calculating wages, benefits, deductions, and tax withholdings. They can also help prevent costly penalties, legal disputes, and ensure that you’re staying compliant with payroll laws and regulations. Additionally, audits can help prevent the misuse of funds. What do we mean by this? An audit can identify and prevent fraudulent activities such as ghost employees, unauthorized payments, or timesheet manipulation (sometimes referred to as “buddy punching“).
Related resource: What is a payroll audit?
Payroll runs smoothly when managed properly
Having a payroll management process in place is important to the success of a business because it goes beyond paying employees accurately and on time. From making sure you get taxes withheld properly and remitted to the correct agencies to create a process that can become part of your operations, you should have more time to focus on other aspects of your business. Whether you choose to handle payroll yourself, hire a specialist, or use advanced software, having this portion of your business buttoned up will keep you informed, organized, and compliant.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.