Payroll is a critical part of running your small business. If you don’t pay your employees accurately and on time or withhold and pay taxes correctly, you can run into a lot of problems with your workforce, the Department of Labor, and the IRS.

Many small businesses choose to handle payroll in-house — often with the business owner or another employee assigned to it. While handling payroll in-house can be a cost-effective option, there are some significant drawbacks and risks to be aware of.

If you’re curious about what it takes to run payroll for small businesses, here is a summary,  along with a breakdown of the challenges that are commonly associated with it. You’ll also learn how an HR partner who provides payroll services can be a great help.

Guide to Payroll for Small Businesses

Get set up

Before you start running payroll, it’s important that you take care of a few items first. You may have already taken some of these steps when you registered your new business, but it’s worth mentioning them again here:

1. Pay regulations & insurance

Familiarize yourself with all federal, state, and local laws regarding pay and insurance. You’ll need to understand how often to run payroll, what information to provide on employees’ pay stubs, minimum wage requirements, how overtime is calculated, how and when to deliver a final paycheck, workers’ compensation, disability insurance, and more. 

Here in Colorado, you can find much of the regulatory information you need on the Secretary of State’s website here. 

2. Employee forms & paperwork

Make sure every employee fills out a W4 form to determine the amount of federal withholding tax that should be taken out of their paycheck. You don’t have to worry about independent contractors filling out this form as they are responsible for paying their own taxes. 

Employees also need to fill out an I-9 Employment Eligibility Verification form to confirm their identity and right to work in the U.S.

And each employee should fill out a direct deposit authorization form if they plan to directly deposit payments into their bank accounts.

3. Employer Identification Number (EIN)

You’ll need your Employer Identification Number (EIN), which identifies your business to the IRS and tracks your payroll tax payments and forms. You can apply for an EIN on the IRS site here. This step is typically done when starting your business. 

4. Electronic Federal Tax Payment System (EFTPS)

It’s also helpful to sign up for the free Electronic Federal Tax Payment System (EFTPS) here so you can pay federal payroll taxes and unemployment taxes electronically and on time.

5. Payroll schedule

Establish what your employee pay dates will be and note your tax payment due dates and quarterly and annual tax filing deadlines. Clearly mark them on your calendar so you don’t miss anything.

Start Running Payroll

Once everything above has been addressed, you can start running payroll. There are multiple steps required to calculate wages, tax withholdings, and tax payments. The following is only a brief overview of the general steps involved in payroll:

1. Employee wages & income taxes

Calculate each employee’s wages and pre-tax deductions, then determine the amount of federal and state income tax and FICA payroll tax to withhold from each employee’s pay. Be sure to track the taxes you owe as the employer in addition to the taxes your employees owe. Finally, determine the amount of any after-tax voluntary or mandatory deductions to subtract from your employees’ pay. 

2. Employee payments

Once you’ve calculated wages and taxes, pay your employees and record payroll totals. Make sure you provide a pay stub for employees that meet state requirements.

3. Payroll tax payments

Per your payroll schedule, as mentioned above, submit your federal, state, and local payroll taxes. 

3. Tax forms & employee W2s

File your federal and any state or local tax forms that apply to your business. Make sure to prepare your annual filings as well, and file W2s for each employee as part of your end-of-year checklist.

4. Records

Keep accurate payroll records that adhere to the Fair Labor Standards Act (FLSA). 

Challenges of Handling Payroll Yourself

Even though it can be tempting to handle payroll yourself — especially if your business is brand new, your staff is small, or you’re working with a limited budget — there are inherent challenges that come along with it that should be considered.

For one, it’s time-consuming. It can take several hours per pay period to manage payroll. Whether you’re the business owner or part of the HR team, carving out the time needed for the intricacies of payroll can be difficult, especially alongside all the other responsibilities you have. 

Secondly, processing payroll manually leaves you more vulnerable to error. With so many important details and deadlines that are part of the payroll process, it’s way too easy to overlook an important date or make a mistake, especially if you’re new to payroll and learning the ropes as you go. 

Using payroll software to automate the process can help, but it requires that you learn a new system — which takes more time you may not have. Some software systems can also be difficult to manage or don’t integrate well with other business processes and systems.

If you do make a payroll mistake, you can face steep fines and penalties, since payroll is subject to numerous federal, state, and local laws. Understanding the components of each law and keeping up with frequent regulatory changes is critical for compliance. But many small business owners and employees lack the time or legal expertise necessary for the task.

Finally, as your business grows, payroll becomes more complex, especially if you start operating in multiple locations. If that’s the case for your business, you’ll have to learn and comply with other states’ payroll laws. 

Get Payroll Help from the Experts

Payroll for small businesses is a multi-step, often complicated process that needs to be handled with great care and attention to detail. But this can be burdensome to small teams, especially with so many other tasks and objectives that need prioritized. 

When you work with a local HR partner, like Obsidian HR, you get access to payroll services — including payroll processing, tax administration, reporting, time and attendance, and PTO tracking. We’ll also make sure your business is in compliance with all applicable laws and regulations, thus reducing the risk to your business. Obsidian HR’s payroll specialists take payroll processing off your plate by managing it for you in a single convenient platform so you can focus on your other business priorities. And as your business grows, Obsidian HR’s payroll services scale with it, so you don’t miss a beat.

To learn more about the benefits of partnering with an HR partner like us, download the guide below! We help with a variety of HR service needs from compliance to workers’ compensation to benefits.