Managing payroll –the system that a business uses to track payments and tax data for its employees – is an absolutely critical part of any company’s operations. Payroll management is one of the most heavily regulated aspects of private businesses; nonetheless, over 40 percent of American companies of all sizes manage their payroll systems in house, with no external support. Failing to oversee payroll effectively can lead to harsh tax, civil, or even criminal penalties; it can also cause your talented employees to lose faith in the company, and seek employment in a firm where they feel their work will be better appreciated. If your business is currently managing payroll, here are four things to think about.

Establish a Pay Period

Having a clear pay period, whether it is weekly, bi-monthly, or monthly, is extremely important. In some states and municipalities, the pay period may be set by laws or regulations.  Salary is an important cash flow expense, so having a plan for when employees will be paid will help your company budget its money more effectively. It will also help you manage your various payroll tax liabilities. Finally, understanding the pay period will help your employees to manage their own budgets as well.

Classify Your Employees

Are your employees full time, part time, or independent contractors?  The IRS will certainly want to know if you are ever audited.  How you classify your employees affects the types of payroll taxes they (and you) are liable for. The total number of full time employees also affects your company’s requirements to provide other benefits, such as health insurance. You should also classify how your employees are paid, in terms of hourly or salaried compensation. This is another decision that will have a major impact on your company’s budget, as well as the tax and regulatory requirements your company will have to meet.

Keep Good Records

Keeping good records when it comes to payroll isn’t just an intuitively good idea; in some cases, it’s the law. Companies are required to keep employees’ W-4 forms on hand for several years, even after they are no longer employed by the company. Staying organized and keeping good records will also help save your businesses time and money. The average company spends about 120 hours each year managing the company’s payroll; having a good recordkeeping system can help keep your firm focused on revenue, rather than cash outflows.

Don’t Go It Alone

If you are one of the 40 percent of American companies managing your own payroll, consider seeking outside help. The IRS is in the midst of a very public crackdown on companies’ classification of employees on their payroll, in an attempt to increase tax collection rates by nearly $9 billion annually. Small businesses, perceived as the most likely types of companies to either purposefully or negligently avoid paying taxes, are a primary target of this enhanced enforcement. So don’t go it alone and leave your business vulnerable. There are dozens of companies that specialize in managing payroll for businesses of all sizes. Many of these companies provide additional services, including tools that can help your company track cash flow more efficiently. A modest investment in a payroll management firm can save you from an audit headache, or worse, further down the road.

Managing payroll is complex, time-consuming – and absolutely essential for any successful business. Establishing a clear pay period, correctly classifying your employees, and keeping good records can get your company on the right path to a solid payroll system. Getting outside help from companies like ADP or Intuit, who specialize in managing business payrolls, can help even more. So take some time to ensure your business is on the right path with its payroll, and seek out help if you need it to ensure your success, paycheck by paycheck.

William Lipovsky owns the personal finance website First Quarter Finance. His most embarrassing moment was telling a Microsoft executive, "I'll just Google it."

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