How to Setup and Maintain Your Payroll Function
Are you struggling to set up payroll in your business? Payroll can be a complex process to set up, especially with requirements from both federal and state agencies. In addition, your payroll function is a prime target for internal and external hacks and attacks.
Understanding how to properly set up and maintain your payroll function will help your business remain in compliance with regulatory agencies and safeguard your assets from internal control deficiencies.
Step #1: Figure Out the Basics
Before you can tackle compliance, you need to work out the basics. What will your pay schedule be? Are you offering benefits, such as health insurance or retirement matches? These are all important aspects that will dictate your filing obligations and the next few steps.
There are a few different pay schedules that your business might choose to follow, like weekly, bi-weekly, semi-monthly, and monthly. Choosing the right option depends on your cash flow.
Will you have enough cash on hand for weekly payrolls or is monthly more feasible based on when customers pay you? Keep in mind that you can always adjust your pay schedule if your cash flow changes.
You should also determine the method by which you will pay employees. Is it through physical checks or direct deposit? Employees should not be paid in cash since there is not a proper paper trail and it’s easy to miscalculate withholding and deductions.
Step #2: Know Your Filing Obligations
After you’ve figured out the basics, you will need to dive into your filing obligations. This step will involve registering with the proper federal and state agencies. Even if you reside in a state with no personal income tax, you will still be obligated to pay state unemployment insurance on wages.
To register with these agencies, you will need to remit basic information about your business, including your address, FEIN, primary contact, pay schedule, and more. Depending on your payroll size and the number of employees you have, you may be required to remit taxes bi-weekly to federal and state agencies.
As an employer, you will also have expanded year-end filing requirements. This generally involves filing W-2s, the 940, the 941, and state reconciliations. W-2s are required to be dispersed to your employees and on file with the IRS by January 31 of each year. This makes it important to keep clean and transparent records throughout the year to meet this quick deadline.
Step #3: Collect All Employee Information
Before you process your first payroll, you will need to ensure the proper employee information is on file. At a minimum, you should have the employee’s full name, address, social security number, and information on how taxes should be withheld.
The IRS suggests you maintain employee information for at least four years. Many business owners keep electronic records of paper forms. This ensures that the files aren’t lost and can make it easy to look up information in the event of an IRS audit.
Remember that there is a difference between independent contractors and employees. Independent contractors do not have any payroll taxes withheld or benefits offered. If you are unsure which labor type you are hiring, reach out to one of our team members.
Step #4: Process Payroll
Now, it’s time to process your first payroll. Before you click submit, you want to double check your employee’s information and the withholdings. Be sure that pre-tax and post-tax deductions are being calculated correctly and taxes are withheld according to your employee’s wishes.
It may take a few months before you are fully comfortable processing your own payroll; however, you can always outsource this function to an expert. In fact, outsourcing payroll can provide additional safeguards and an independent check of what is being paid out, reducing your risk of fraud and asset misappropriation.
Step #5: Frequently Review Internal Controls
Internal controls are essential when processing payroll. Proper internal controls can prevent and detect instances of fraud. Would an employee be more likely to inflate hours when they know payroll is going through rigorous checks for accuracy? Probably not.
Even if your business only has a few employees, you are still at risk of fraud. Studies show that payroll fraud is present in 27% of businesses. This could be through falsified wages, fictitious employees, overstated timesheets, or fake reimbursements.
On a regular basis, you should have policies and procedures in place that assess your payroll internal controls. For example, conducting a surprise payroll audit every few months or reviewing written policies that employees agree to.
If you’re a small business, it can be difficult to properly segregate duties. Ideally, the same person processing payroll shouldn’t be completing bank reconciliations or managing your accounts payable and accounts receivable functions. If this isn’t feasible, consider having third-party compliance and internal checks to monitor controls.
Step #6: Contact an Expert
When in doubt, contact an expert. If you’re like most business owners, your to-do list is never-ending. This opens the door to increased errors in payroll processing, compliance with regulatory agencies, and internal control checks. Passing the baton off to an expert might be the solution you are looking for.
In addition, if your business is selected for an IRS audit, you don’t want to go in blind. The right accounting professional should be well-versed in handling payroll tax problems, minimizing your risk of stiff fines and penalties. The IRS is less than lenient when it comes to enforcing back taxes, meaning you want the right team advocating for you.
Are you ready to set up your payroll function? Whether you need a little guidance or comprehensive assistance getting your payroll up and running, our team at Craib Accounting is here for you.
We can help you maintain your regular payroll schedule, ensuring employees get paid timely and accurately. Not to mention that our independence is essential when it comes to maximizing internal controls and minimizing your risk of fraud. For more information on how our team can help, reach out to schedule a consultation.