It isn’t necessarily easy to pay employees exactly what they’ve earned, at precise intervals on an ongoing basis, and to meet the government’s payroll tax requirements consistently and accurately. In fact, managing payroll can be downright hard.
Yet, paying employees late or miscalculating their wages undermines their confidence and can decrease their motivation, engagement, productivity and retention levels – all of which negatively impact your company’s bottom line.
Your small or mid-sized business can follow these five best practices to make payroll accurate and (relatively) pain-free:
1. Correctly Classify Employees
The IRS and Department of Labor have specific standards of classifying employees for wage reporting, overtime and tax purposes, and payroll tax responsibility can vary depending on an employee’s classification. Misclassifying someone who performs work for you – classifying someone the IRS would consider an employee as an independent contractor, for example – can lead to the unintentional miscalculation of wages and reported hours. Incorrect classifications may result in stiff penalties.
Here are the different types of employees under the DOL and the Fair Labor Standards Act (FLSA):
These employees are exempt from overtime due to being qualified under certain standardized tests of professional or managerial job duties.
Nonexempt employees are subject to FLSA overtime laws and must be paid overtime after 40 hours worked in a workweek.
Here are the classifications of workers:
Employee (receives Form W-2):
Employees receive materials and direction from an employer to perform work within a determined period. Employees do not assume the risk of lost income should work not be performed correctly.
Contractor (receives Form 1099):
Independent contractors provide their own materials, do not receive direction on how to perform their work and assume a loss should work not be performed correctly.
2. Verify Employees
To avoid running afoul of immigration laws and incurring related fines, it’s crucial to promptly verify new hires’ identity and employment eligibility. Audit your United States Citizenship and Immigration Services I-9 forms and update them as necessary to ensure you have current versions on file. Federal programs, such as eVerify, can assist with consistent verification of all employees’ eligibility to work in the United States.
Companies increasingly are stepping away from issuing paper checks in favor of paying their employees via direct deposit. Using direct deposit saves both employers and employees money and frees up administrative time that can be dedicated to other projects.
5. Use Online Payroll Software
A full-featured payroll system automates processes, improves accuracy, centralizes records and tracks the latest compliance requirements. Powerful payroll software also enables more effective document management and organization, data protection, time and attendance collection, tax compliance and easy access from anywhere.
Avoiding payroll mistakes is critically important – and far easier when you understand the relevant legal guidelines and have the right systems in place. Use every tool at your disposal to eliminate manual tasks that invite human error and consume time you could reallocate to business-building activities.