Whether you’re a mid-tier enterprise with an office staff and team of independent contractors, a small business owner drawing your salary, or an agency working with a mix of employees, you have to tackle payroll and reporting.
Did you know that payroll is one of the most complex and high-stakes areas of accounting? It is one area with incredible consequences for errors and inaccuracies. Below are our 8 tips for ensuring your payroll department is functioning correctly.
Understand the Distinction Between Employees and Independent Contractors
One of the most common reasons audits happen for businesses of all sizes is improper designation of staff. In short, employees incorrectly designated as independent contractors and independent contractors incorrectly listed as employees. There are many rules regarding scheduling, pay, hours, and benefits access that are applicable in either scenario, so it’s important to be absolutely certain that you are designating employees correctly.
Stay Up to Date on Payroll Regulations (or work with a CPA who does)
Regulations can mean tax rates, wage minimums, employment designation, and reporting and payment deadlines. In short, payroll regulations can be a lot to keep up with. If you want to be sure you have the most accurate information, you’ll need to plan to visit the IRS and your state website’s regularly, subscribe to any newsletters for updates, and monitor what tax experts and attorneys are saying about payroll regulations.
It sounds like a lot, because it is. This is one of the biggest reasons most accounting departments outsource payroll.
Utilize Payroll Software
Your payroll software shouldn’t just be for issuing checks. It should include automation, be easy to generate pay slips, tax forms, and monitor withholding, and should have capabilities to generate reports on performance and labor costs.
Payroll software typically needs to be more and more robust the larger your workforce grows.
Spread Your Payroll Duties Across Qualified Staff
Good risk assessment designates that payroll duties should be shared across qualified staff, with checks and balances established. This reduces key risks like embezzlement, payroll fraud, errors, and omission. The key here is separating components of the same task (i.e. the person who process timecards and approves time off may need to be a different person than the one who issues payroll). This way, there are two individuals likely to notice any mistakes or errors. Of course, this depends on the size of your accounting department. Many businesses opt for regular third-party audits from a qualified CPA to monitor for any anomalies and advise on establishing checks and balances.
Monitor for Overtime, Vacation Days, etc.
It goes without saying that if you have employees clocking in, you must have a reliable time tracking system. So, too, should you have a system for monitoring vacation days (days accrued, days taken, requests, etc.) if your employees are salary. Overtime limits may be a part of your system as well, which means monitoring for any going over.
Poor monitoring can result in overpay, underpay, or incorrect data in your payroll system, which unfortunately does have legal and financial consequences.
Make Sure Benefits and Withholding are Managed Correctly
A tedious part of payroll is ensuring that employee portion of benefits are withheld from paychecks, reported, and paid on time, as well as distribution to other benefit plans like 401k, health insurance, dental, etc. Typically, your employees will have different amounts deducted from each paycheck, while independent contractors will have none at all. This is where staff documents come into play—you must make sure benefits and withholding are managed and distributed appropriately and on time.
Regular payroll reconciliation can be helpful to ensure that everything is accurate.
Keep Up With Reporting Requirements
Whether its distributing tax documents like W-2s and 1099s to staff on time, submitting IRS tax forms to report employer portion of health insurance and benefit distribution, or getting your annual payroll reports to your CPA, it’s absolutely critical that reporting is done on time. Tardiness in these areas can result in unhappy staff, IRS penalties, delayed filing and payment of taxes, and, in the worst cases, litigation.
Know When It’s Time to Bring in a Pro
Perhaps your beloved bookkeeper has retired, your accounting staff has grown overwhelmed with an influx of inventory and accounts payable, you’re simply seeing too many errors in payroll, or you simply want to rest easy that your payroll is being taken care of efficiently and ethically, any time is a good time to bring in a pro. Our team of CPAs are experts in payroll regulations, software, and strategies, and can advise you along the way while offering reports and dealing with the details of ongoing management of day-to-day payroll needs.
Payroll is a critical component of every business, from the single member LLC to the S-Corp taking a single owner salary as a deduction to the mega corporation staffing hundreds of thousands of employees, independent contractors, and consultants. While the tips provided above can ensure your payroll system is well-functioning, it is always best to speak directly with a CPA.
