Avoiding the Payroll Headache

Creating a successful business takes more than a good idea. It also requires you to pay attention to a variety of details. One such detail that you can't ignore is doing payroll properly. If you make even a single mistake, it could anger your employees or draw the attention of state and federal tax agencies.

Don't Do Payroll By Hand

To reduce the chances that you make a mistake when doing payroll, you should have it done by a computer software program. All you need to do is input your numbers and the program will determine how much tax is owed. It can even fill out payroll and income tax forms for you and send them to the right tax agency. Many of these are done by a payroll service company and are cloud based with guarantees that it will be done accurately to avoid Federal penalties.

Other options include creating a dedicated payroll department within the company or outsourcing payroll to a bookkeeper or administrative assistant. According to a report from Wasp Barcode Technologies, 71 percent of small businesses outsourced at least some of their accounting functions.

Make Sure Taxes Withheld Are Actually Deposited to the Government

Taxes that are withheld from an employee's paycheck must actually be sent to the government. Failure to remit taxes owed could result in a costly audit that may bankrupt your company and put your own finances in jeopardy.

The best thing to do is to keep any taxes withheld in a separate account that no one in the company can use. This makes it less likely that you will spend the money either to cover other bills or for personal reasons. These taxes are pulled quarterly (state taxes differ by state). If you have a hired a company to handle payroll for you, they most likely take the amount owed to the government out every 2 weeks and submit it for you each quarter.

Keeping up with payroll taxes and other payroll expenses is a matter of managing your cash flow. Part of managing your money is paying your employees in a manner that is convenient for the company. While most companies pay workers each week or twice a month, it is possible to pay employees monthly.

Properly Classify Your Workers

It is tempting to classify your workers as independent contractors. If you hire an independent contractor, you don't have to provide insurance and other benefits. You also don't have to pay payroll and other taxes on behalf of that person. However, you don't decide how to classify your workers. That is up to the IRS. If you classify an employee as an independent contractor, your company could be forced to pay half of that person's payroll taxes retroactively in addition to other fines and penalties levied. A good rule of thumb is that if the person requires management and is required to work at a given location and keep a specific schedule, they are an employee. A contractor works independently and on their own schedule in general.

If you have people working for you, you need to make sure that they are properly classified and are paid on time. While it may represent an added cost, paying for payroll software or outsourcing your payroll to an outside firm may actually save quite a bit of money in the long run. It will also keep your people happy and your business in the good graces of the taxing authorities