What Is Payroll? New Advice for Small Business Owners

Payroll is among the more frustrating aspects of running a business. In this article, we detail what payroll is, and ways to make it work for you. Most importantly, we discuss why it’s worth choosing an experienced payroll company to provide accurate payroll services.

What is Payroll?

Payroll is the process of paying employees, paying taxes, and keeping records of having done both. Payroll functions as a type of accounting system, but one designed specifically for distributing money to employees for their work. These systems help businesses comply with the various federal, state, and local laws in regards to paying employees and taxes. 

In simpler terms, payroll is a process of making sure that employees and the various government bodies all get the money legally due as a result of people working and getting paid. 

The government doesn’t care if employers do this themselves or hire a payroll company to do the job. Most business owners prefer their payroll systems to automate payments wherever possible, but it’s not uncommon for businesses to manually report their workers’ hours at the end of each pay period. 

Are Accounting and Payroll the Same Thing?

While it is a type of accounting, payroll and payroll processing are systems with different features than regular accounting systems and software. Payroll systems usually connect to time clocks and have features allowing employers to track and edit time worked by employees. 

In other instances, employee pay is related to their sales or performance. A third possibility, payroll is completely unrelated to any time or production, but is only based on contractual agreements.

Most business payroll systems automatically pay workers at scheduled times of the week or month. This is based on set schedules that they have set up in advance. These two ideas are something that makes accounting and payroll entirely different. 

Accounting is just a process of keeping track of income and expenditures that a business has. Usually for the purposes of paying taxes and understanding the financial health of the business.

To learn more about the differences between these two topics, check out our article on this topic.

Does Every Company Have Payroll?

No, not every company has a payroll. Only companies that hire employees and pay wages or salaries must have a payroll. For solo practitioners, freelancers, and partnerships, it’s not necessary to have a payroll at all. Businesses like these can disperse profits however they see fit. They don’t need to pay in the same way that businesses with employees are. They might, however, find that an accurate payroll functions as a tool to help them achieve business objectives. 

Small businesses that don’t have a payroll don’t become exempt from all the taxes that companies with payrolls must pay. In many and most cases, these small businesses actually end up paying more in taxes relative to their earnings.

Ways to Do Payroll

There are a few ways to do your payroll. The first is to use a payroll service that handles all the calculations for you. The other way is to handle payroll on your own, or hiring an accountant or bookkeeper to handle the payroll in-house. 

Both of these options have pros and cons, but ultimately it depends on what makes more sense for your business. Many small business owners discover they actually save time and money by hiring a payroll provider to handle this work. It can be time-consuming, tedious, and easy to make errors. Further, employers must pay employees regularly, on time, and without exception. It’s the kind of thing that people don’t tolerate tardiness with.

Using Payroll Software

A third option is using payroll software. This is something of an in between. Payroll software is not going it alone, but it’s not the same protection that you’ll get by utilizing payroll professionals. Make no mistake, payroll software programs will definitely speed the process up if you’re going to do it yourself. Even the worst programs will probably catch some errors you would make, but these programs aren’t foolproof. Even if they guarantee compliance, trusting software to know the specific details of your business creates a risk.

It is telling that large payroll service companies create and distribute most payroll software available on for small businesses. Their payroll software is simply an alternative option to utilizing their more comprehensive services.   

Whether you’re doing it yourself or using a provider, the most common and popular way is automatic pay. Employers can set this type of payroll system with a computer program that processes a company’s payroll electronically every week. To set up one of these systems, you must have an automated payroll account at your bank or credit union. This account must always have a healthy amount of funds and can never run lower than an established amount. If your weekly payroll is $10,000, it’s a good idea to ensure there’s never less than $20,000, just to be on the safe side.  

Beyond the decision between doing payroll yourself, hiring a comprehensive payroll provider, or utilizing payroll software, there’s the decision of how employees will actually receive their money. Most businesses nowadays offer multiple options.

Paying Employees With Cash

While increasingly uncommon, it is still possible to pay employees in cash. That said, we don’t recommend this method. The IRS and accountants both frown upon cash payments because of the chance that employers will make mistakes and not make proper deductions. It’s also much more labor intensive as it requires business owners to physically retrieve and make note of every payment. 

Payments made in cash still happen, but it’s often that cash is the preferred method for the reason that it’s almost untraceable. Workers, employers, and regulators call this method paying under-the-table, and is 100% illegal.

One of the most popular ways that employers still use cash is for holiday or year-end bonuses. This doesn’t make them exempt from taxation, business owners need to report cash bonuses along with regular income.

Paying Employees With Paper Checks

Although businesses use paper checks as a form of payment less frequently, often replaced by digital payments, many employers still use them. Many people who have been in the workforce for a long time have grown accustomed to getting a paycheck and might still prefer this method. 

Some individuals cannot utilize banks, for whatever reason, and still employers need to provide them paper checks in order to pay them. This is definitely a minority of workers, but it’s not entirely unheard of.  

Although this article is focused on using paper checks to service providers, the reasons listed are still viable and apply to payments made from employers to employees, too.

 

Paying Employees With Direct Deposit

Direct deposit is a payment where employers can automatically and directly send paychecks to employees’ bank accounts. This method is often beneficial to employers and employees alike. For business owners and managers, it’s a convenient way to keep track of who’s been and when. The immediate result of this is a reduction in the labor required to get employees their money. It almost reduces the likelihood of making any errors. 

For employees, it eliminates the possibility of theft, damage, or getting lost while in the mail or in an office. Something not often considered, it reduces the chance of identity theft. In almost all cases, it also results in them getting their pay quicker than with traditional paper checks.

Lastly, it benefits the environment, as direct deposit requires less paper. Most direct deposit systems allow for employers to make it possible for employees to opt into a digital paystub system. 

Paying Employees With Debit Cards

Another method employers can pay their employees is by issuing them prepaid debit cards. This method also limits the amount of labor required to provide workers their earnings. It also doesn’t require them to have a bank account in order to get paid. The IRS even provided this option for people to receive their tax refunds and was used for pandemic stimulus payments.

Paychecks, Paystubs, and the Benefits of Staying Organized

In most places in the United States, employers must provide their employees with pay stub each pay period. This is true whether employees choose a paper check that they physically need to cash, or go with direct deposit.

This pay stub contains information about the total amount earned during that pay period. This shows any deductions from earnings such as taxes, insurance, retirement, or other specific deductions that employers established. While all employers have to deduct taxes and deductions from paychecks, there is no “standard” universal amount. Each business needs to do this according to their specific circumstances. There’s also the possibility that your state has requirements like a retirement savings program that you’ll have to set up.

Yes, in some parts of the country, employers are still not required to provide a pay stub. That said, it would be very unusual and suspicious to provide pay without providing an accompanying document. We don’t recommend this, for your employees sake or your own.

Understanding Payroll Taxes and Deductions

Payroll taxes and deductions are an absolutely crucial aspect of business that many employers have to deal with. They’re tricky to navigate if you don’t know exactly what’s required. More importantly, how much money they take away from your company’s bottom line. While there are some situations in which ignorance is bliss, getting payroll correct isn’t one of them. Awareness of your business’ overall profit or loss is crucial to making most decisions. The IRS has also made their intentions to go after employers who fail to withhold properly in recent years.

To clarify these concepts and avoid errors, we’ll cover common payroll taxes and deductions for US businesses.

First, what is a payroll tax? Payroll taxes are a type of tax that is paid by employers to the government. They exist to fund programs at both state and federal levels. This inclusdes social security, Medicare, unemployment insurance for state income tax, and federal income tax.

It’s most accurate to say that payroll taxes are taxes that are shared by employees and employers. That said, employers have to ensure appropriate deductions, divert them to an appropriate account, and paid those taxes at the proper times. Employees aren’t responsible for any of this, nor are they responsible for the costs associated with getting this done. 

What Taxes Need to be Deducted?

While employers in all 50 states need to pay federal taxes. This includes income taxes, Social Security, Medicare, and other taxes specific to the state where the employer operates their business. The rates which need to be deducted can vary from one employee to the next. The amount they earn, their exemptions, and other specific factors are specific to the individual. 

Some other examples of withheld taxes are family leave insurance, unemployment insurance, disability insurance, workforce and development, and so on. 

This is one of the reasons that many business owners choose to hire a payroll provider. Calculating these precise numbers can result in a headache, and come with penalties and hefty fines if calculated incorrectly.

While not a tax, employers might want or have to help employees access health insurance or establish a retirement account. They can establish systems to automatically deduct employee contributions for these benefits, same way as state and federal taxes. In the best case scenario, a properly established payroll serves as a mini human resources department for everyone, helping employers achieve business objectives while at the same time helping their employees achieve financial goals, too.  

How NJ Business Owners Can Calculate Proper Deductions

For business owners in the Garden State, the state has provided a comprehensive PDF that details everything you need to know about calculating deductions from employee paychecks. This document is, believe it or not, actually quite straightforward and to the point. That’s not to call the document simple, it’s just better than most documents provided by government agencies. 

That said, it’s easy to look at this PDF and quickly understand why many employers choose to hand their payroll off to a company that specializes in it. If you’re not familiar with the process, it can be a time-sink and extremely stressful to do yourself.  

Choosing a Payroll Provider

Choosing the right payroll provider can be difficult because there are many different options out there. The first decision that many business owners find they have to make is to go big, or to go local. There is no right answer for this, only different answers. 

Just as your business needs to deduct amounts from each employee’s paycheck that is specific to New Jersey, locality, and individual circumstances, there is no “right” answer for picking the perfect payroll provider

Yes, it’s a bit of a pain in the neck, but payroll is an essential component of any business; it’s the fuel pump for your economic engine. With a good system or provider, your employees quickly and easily receive the wages and benefits owed. It also makes sure that Uncle Sam gets his due. Whichever path you take to fulfill your payroll needs, it’s worth the time and/or money to get it done correctly.

Big Name Corporate Providers

There are several large, well known payroll companies that provide payroll services to companies of all sizes. These companies are very large corporations with thousands to tens of thousands of employees. The best known companies are ADP, Paychex, Intuit Quickbooks, Gusto, OnPay, and Square. There’s a very good chance that if you’ve ever received a paycheck, one of these companies listed above gave it to you.

The Pros and Cons of Choosing Larger Companies

It’s shortsighted and overly simplistic to say that big payroll companies are a good or bad decision. For some businesses, they’re the perfect answer to their payroll needs without question or concern. For others, these corporate giants are far too disconnected, rigid, and expensive to be a good choice. As with most things in business, it depends on your situation, specifically.

The Pros

For businesses that have employees and operations in multiple states, and potentially even multiple countries, it can be beneficial to choose a company that is familiar with the regulations in multiple jurisdictions. There’s also the sheer size of the business, for those with employee rosters that reach into the thousands and maybe even the tens of thousands, it would probably be beneficial to choose a larger company to match your size. 

The Cons

That said, bigger isn’t always better with payroll companies. Choosing a comprehensive payroll company that is known far and wide might sound like a good idea for any business, but choosing the wrong size can have negative consequences. Selecting a big name for no other reason than brand recognition could have you paying for the privilege of hiring a publicly traded company, but not getting much in return for it. 

Yes, it’s possible that large companies can be more competitive and offer more comprehensive services, but it’s always important to look at the actual costs. They also have higher overhead costs and might be less nimble in their ability to help your business specifically. You’ll notice, I’m not picking out any companies by name, because some large payroll providers might be perfect for your business. 

It’s just important to consider that for every service a large provider offers, they’re charging for it, even if it’s not something that your business needs or utilizes. It can also be more difficult to promptly get in contact with someone to answer questions or solve any problems that might arise.

 

Payroll For Small to Mid-Sized Businesses

Small mid sized businesses can have a difficult time finding reliable payroll services. Despite outnumbering larger businesses in terms of both employees and innovation, many companies find payroll to be an ongoing nuisance. One of the biggest issues is that business owners have to be their own advocate when dealing with payroll. For this reason, many small businesses prefer small, local payroll providers that share their values and community.

Benefits of Choosing a Local Payroll Service

Choosing a local payroll service can be a game changer for small mid sized businesses. These payroll providers have a much greater interest in providing excellent service, have lower overhead, and know you and your company on a human level, not simply a corporate one. Check out our further article on the benefits of small business payroll if you’re interested when you’re done this article.

Local Providers Know You Personally

Small business payroll services are more likely to start their working relationship with a handshake, not just an electronic signature. They often know and patronize their clients’ businesses because they live in the same communities. This makes each relationship higher stakes for them.

This may seem minor compared to other factors, but it’s good to know your business is an important portion of their business. It’s also good to know that their reputation depends on your approval. Huge international payroll companies aren’t worried about losing your business, it’s such a minuscule portion of their overall revenue. 

In contrast, small, local providers need your business much more. Further, they know that if they fail to provide you with quality services, you’ll likely tell friends and other business owners about the bad experience you had with them. This doesn’t guarantee quality service, but it certainly makes the price they’ll pay for providing bad service much higher.   

Local Providers Might Offer Additional Services

Local payroll providers often offer additional services that a growing business needs. In addition to comprehensive payroll services, there are development, accounting, and tax services. You will save time when working with someone doesn’t just understand small businesses, they understand yours

Unlike larger providers that have entire human resources departments dedicated to such offerings, local providers have a limited payroll themselves, so they don’t need to charge every one of their clients for unused services.

Local payroll providers do more than small business payroll, they often provide excellent customer support, and can supply employers with business resources that they wouldn’t have access to otherwise. They also stay up to date on local laws and regulation because those are topics that affect them just as much as their clients. 

You Won’t Become Lost in the Crowd

With big providers, it’s far more likely that small business owners become a number in their giant portfolio. Instead of prompt, attentive service, there’s a good chance that these companies will prioritize their biggest clients, and put smaller ones on the back burner. 

It’s a good idea to look and see what a company really means when it makes claims about how available it is to answer questions and solve problems. Many companies promise 24/7 customer service, but it’s a good idea to consider if that’s even possible. Who will you talk to when you call? Someone that knows your employee payroll particulars, or someone who knows nothing of your company? 

Wrapping Up 

This is a big topic, and we’ll be covering it in greater depth in the coming weeks and months. The good news is that there’s always a solution to any payroll problem or concern. It’s tedious, it has to be right, but it’s not splitting the atom, it’s just a thing that has to be handled.