Payroll Management: 4 Critical Tips for Startups [2021] 

by Adarsh Raj Bhatt in August 10th, 2021

Let’s begin by getting the foundation right.

What is payroll management?

Payroll management refers to the management of the financial records of a startup’s staff. These financial reports comprise details like employees’ wages, salaries, deductions, bonuses, incentives, allowances, reimbursement approvals, and net pay. Payroll management also involves the constant maintenance, monitoring, and revision of all the financial records that concern the startup’s employees.

If you are a small/medium startup founder or an HR person responsible for handing out payroll or are just curious to learn the basics of payroll management, you’ve reached the right place. 

We’ve developed four easy-to-implement payroll tips that sound simple enough but are certain to simplify payroll management at your startup by leaps and bounds. 

Hiring is one of the primary challenges that a startup encounters when it is getting off the ground and starting to pick up speed. The prospect of bringing someone new aboard can be particularly daunting if you aren’t planning on announcing payroll management jobs at your company anytime soon. This means that for managing your team’s payroll, you have no one to depend on but yourself. (Alternatively, of course, you can always depend on AbstractOps for payroll and all other administrative ops).

In fact, the riskiness, quantity, and complexity of a startup’s back-office work (aka "general and administrative" work) all shoot up in sync with the addition of every new team member. 

An average startup founder will typically stress over these three questions:

What kind of administrative paperwork needs to be attended to after onboarding a hire? Which payroll management system to set up for paying new employees in a secure, efficient, and scalable way? How on earth should one go about taxes?

What’s critical to understand is that whether or not they’re made at a significant scale, payroll mistakes tend to be costly in terms of founders’ time, money, and focus.

With that said, there is no reason to be intimidated by the process. You will be ready to run payroll like a seasoned pro once you’ve gotten the basics down. 

What are the basics, you ask?

4 Basic Pillars of Payroll Management

#1: Know the Difference between Employees and Contractors

#2: Pay Attention to Payroll Taxes

#3: Create a Smart Payroll Schedule 

#4: Get Overtime Right

With that said, let’s dive into these!

#1: Know the difference between employees and contractors

Small startups often ease into hiring by roping in contractors to work on specific projects. It is critical for such startups to understand the differences between the full-time employees on their payroll and the contractual employees

Even the IRS emphasizes the crucial centrality of identifying your full-time employees. That’s how you know that getting your company’s FTEs right is no small matter.

So, what are some of the major differences between employees and freelancers/contractors?

For starters, before the work begins, employees need to fill out a W-4 form while freelancers/contractors need to fill out a W-9 form

Tax reporting is the biggest area of difference between employees and contractors. 

You will be responsible for withholding tax money from the paychecks of your salaried employees and passing it on to the government for mandated payments such as for Social Security and income tax. A W-2 form will outline exactly how much was withheld and how much was paid to the employee come tax time, and your employee will use it to pay their personal taxes. 

On the other hand, contractors are individually responsible for paying taxes on their income throughout the year. You will provide them with a 1099 form at the end of the year, outlining how much you have paid them, which they will then use for their personal and business returns. The information on the contractor’s W-9 form always turns out to be helpful at the time of reporting on a 1099 form. You are not responsible for managing the tax withholding process for contractors. 

In addition, all the money paid to an employee during a tax year needs to be reported on the W-2 form, while a 1099 needs to be issued only when the contractor gets paid $600 or more during a tax year. If issued, it is necessary to send the 1099 to the IRS. 

It would also be helpful to know that in contrast to employees, contractors are not covered by state or federal laws pertaining to labor and employment. 

#2: Pay Attention to Payroll Taxes

When it comes to paying taxes, who you pay and what you pay will depend on your location. 

For example, there are some locations that levy a wide variety of taxes (some not even based on income), thereby managing to squeeze lots of different taxes out of companies. 

Here are five spots that are known to do this:

  • New York City (and NY State)
  • San Francisco 
  • Oregon 
  • Massachusetts
  • New Jersey

Based on your location, there may be local, state, and federal tax requirements that your startup will need to abide by. 

These tax requirements usually fall into the following categories: 

Spend some time researching and understanding your specific tax requirements because missed payments can be costly. A great place to start this research would be the IRS website

Do not take this task lightly. The sheer cruciality of filing the right type of taxes, in the right way, and at the right time cannot be overstated. 

Bottom Line? 

Hell hath no fury like the IRS scorned. 

In fact, there is an interest rate on unpaid taxes that’s determined every quarter. For instance, currently, an interest of about 5-6 percent per year is levied upon unpaid taxes, not to mention nasty late-payment penalties slapped on businesses every month. All in all, the sooner you pay and the greater percentage of due taxes you’re able to cover, the fewer fines and penalties you will incur.

#3: Create a Payroll Schedule

Payroll is usually the biggest expense incurred each month for most startups. Therefore, your cash flow can be largely impacted by when you choose to pay your employees. 

Of course, in the case of contractors, consultants, or freelancers, there is oftentimes not a recurring, employee-like salary but a lump sum that is paid when the work stipulated in the contract is completed. In this case, too, it's worthwhile to analyze and anticipate the tentative date of contractors’ payouts in relation to your cash flow.

The question is:

Which of the four payroll schedule options allowed in the U.S. do you want to stick to for paying your employees: bi-weekly, weekly, once a month, or bi-monthly? 

A once-a-month payment might be the way to go if all of your accounts receivable tend to roll in toward the end of the month. Of course, there also are employee expectations and industry norms to consider. Some employees might be unable to wait until the end of the month for payment. 

So, make an effort to understand your potential team’s financial needs and analyze your cash flow before formulating a payroll schedule

Here’s a great infographic that breaks down the pros and cons of the four popular payroll schedules in detail: 

#4: Get Overtime Right

You probably know the sweet feeling of receiving time-and-a-half payments if you have ever worked retail on a holiday. 

However, being on the other side of the table as the employer, you now need to understand the regulations around overtime pay and make sure that you are following them strictly. You might owe penalties, back pay, or interest if you don’t pay your team the correct rate. 

After the standard 40 hours, your workers get 1.5 times their regular pay for every hour worked, according to the government. 

However, this rate does not apply to your full-time salaried employees. They are paid a salary based on the amount of work and the skill level expected of them, instead of being paid hourly.

Payroll Management Services

In order to manage payments to employees and oversee the tax obligations that go with it, bigger companies often rely on enterprise payroll management systems, coupled with a payroll staff. 

Such a robust setup makes payroll effectively pain-free. 

With that said, do not be afraid if you don’t have the same kind of resources at your disposal and can’t afford a payroll management company. Seriously.

There are many really great payroll management services out there. You just need to research the pros, cons, and (genuine) customer reviews of about 10 of the most popular ones.

Which is precisely what this payroll article is all about. 

Once you’re done going through that article, you’ll just need to settle on the payroll service that aligns well with the needs of your startup.

Everything else related to payroll management is relatively simpler from that point on, as long as you pay heed to the four essential payroll tips we’ve discussed above.

Learn More

What is payroll management? 5 reasons to use a payroll management software 

The best payroll processing software for a startup

Payroll Automation: Why and How it should be done at Startups

We can help!

At AbstractOps, we help early-stage founders streamline and automate regulatory and legal ops, HR, and finance so you can focus on what matters most — your business.

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