What is the Payroll Process

by Brandi Marcene in

pink pig figurine on white surface
Introduction

Running a successful startup often becomes more complicated when the payroll process is nowhere near efficient. In fact, a well-thought-out and dedicated payroll process is crucial to maintain viable and long-term operations.

But as a startup, when you hire more employees, an inefficient payroll process can lead to mismatches, loss of market reputation, and even theft. If you want to gain a competitive edge with your key competitors, establish the key parameters of your payroll process in order to maintain streamlined operations.

Learn the basics of payroll processing in this detailed guide. With effective payroll management, you will always be ready to deal with the “next” tax season without added stress or surprises.

What is the Payroll Process?

In layman’s terms, payroll processing is the act of managing the salaries of employees. The major aspect of payroll processing often revolves around collecting essential information of employees. Payroll processing is a time-sensitive task that requires flawless integration of key elements.

For instance, the information about deductions, benefits, specific periods, and pay distribution among employees has to be errorless.

Today, most startups use some form of payroll processing and management software. Check out our guide to selecting the right payroll processing software for your startup.

payroll software
Why is payroll processing important?

One of the quintessential aspects of running a successful startup is to ensure your valuable workers get paid. Often, founders get caught in the legal hurdles and new policy changes that make payroll processing even more complex.

Still, as a startup, you have to follow the course of legal responsibilities and maintain compliance. Fortunately, there is now less bureaucratic and hierarchical interference when it comes to payroll processing.

In fact, you can break down each element of your payroll process and automate operations for the foreseeable future. It does, however, require startups to embrace a much broader approach. In the long run, it would be easier to handle your expanding payroll process.

In a competitive capitalist age, a new startup’s success boils down to its hired talent. Therefore, it makes sense to streamline the payroll processing to avoid disruptions, miscommunication, and disorder. As a founder, you probably juggle back-and-forth multiple responsibilities, but prioritizing payroll processing would secure the future of your startup.

How Payroll Process Works?

Whether you outsource, run in-house payroll processing, or avail third-party services, your priority should be to streamline various processes of payroll management.

You can implement more portals that will keep an eye on employees’ total working hours if you do require hourly time tracking. Once you have this information, you can calculate taxes, salaries, make deductions, and finalize the paychecks.

You have a few options to run your payroll processing:

Outsource

You can ask a third-party accounting firm or freelancer or independent contractor to take care of your payroll processing.

In-house

You can hire an employee or team to maintain and process payroll operations. The individual assigned for such a task, however, must have some bookkeeping experience to run, manage, and process payroll.

Payroll Services

You can ask an online payroll provider or install dedicated payroll software to handle different aspects of payroll processing. Most payroll and accounting programs come with tax filing, tracking, and payroll processing features.

If you're a startup, getting one of these payroll software can simplify your life.

Key Considerations of Payroll Process

Figure Out Your Startup's Needs

Before you develop an efficient payroll process, make sure you’re aware of your business needs. Find out how you would align your business needs with efficient payroll processing.

Often, startups follow a basic payroll process, but there is a good chance you will need HR support, automated features, integrated applications, and help from professional accountants and tax experts.

You'll need answers to questions such as:

  • What is the frequency of salary payments required?
  • What type of employees do you have - part time, full time, hourly? Do you work with contractors?
  • Are you hiring in one state or across multiple states? What are the payroll tax requirements across these states?

Establish Budget Limits

Once you understand your startup business needs, assign a realistic budget. You can collaborate with your CFO to set specific budget limits and stay on the right roadmap.

Budgets to keep in mind include salaries and compensation structures, book keeping expenses, and payments made toward any software or tools you use to manage payroll.

Categorize Your Employees

On the surface, it may sound easy, but it requires some manual effort to categorize employees. And that’s because most businesses hire a combination of independent contractors, freelancers, and full-time employees.

It means you should be careful to categorize the nature of employment rather than assigned roles.

Review State and Federal Laws

Each state has its specific taxation, payroll management, and employment practices rules. Therefore, take some time to look at the local, state, and federal laws to make sure you’re compliant.

Get HR Support

Most startups combine their HR and payroll processing efforts. Your objective should be to make payroll processing make convenient.

It will also help you personalize your onboarding process for new potential candidates and manage employees’ fringe benefits.

Determine a Payroll Calendar

Another important consideration for startups is to use a payroll calendar and determine key dates. The idea is to establish dates that work for your startup business. In some cases, businesses issue paychecks two times per month.

Most businesses, however, opt for a monthly paycheck system. After you establish the periodic paycheck schedule, you can set reminders or alerts to pay your workers on time.

Benefits of Payroll Management

There are many benefits of running and managing efficient payroll processing operations for your startup.

Manage Employee Information Effortlessly

An advantage of efficient payroll processing is the ability to manage the information of all employees in a centralized, organized source. A payroll system can help you in managing changes to specific groups of employees or specific employees with ease.

Statutory Legal Compliance

With efficient payroll processing, you can maintain employees’ numerous payment records with ease. As a result, it helps you remain in compliance with federal and labor laws.

High Employee Morale

One of the benefits of efficient payroll processing is to ensure systematic payments to your employees. It reaffirms the preconceived expectations and standards of employees in your startup.

Plus, it reflects the high integrity of the business in front of your employees. Having an efficient and reliable payroll system gives employees comfort and confidence in your startup's journey.

Plan Ahead of the Time

If you run and manage a flawless payroll process, you can use collected data to forecast hiring and budgets, and make logical business decisions for the coming years. Some systems give you the view of progress made towards hiring goals and budgets which is helpful in course-correcting as and when required.

Save More Time and Money

The more efficient the payroll processing, the more money and time you will be able to save. However, you can step further and automate various minor payroll processing tasks to save even more costs and precious time.

Generate Reports

With efficient payroll processing, you can generate comprehensive reports on the salary structure and attendance of your employees. You can choose an automated payroll system to process these tasks without manual effort.

Steps to Set Up an Efficient Payroll Process

Like established businesses, startups have to be as diligent and considerate throughout payroll processing. Often, it just takes one mistake to wreak havoc in entire payroll management. In order to get a handle on your payroll process, bring your HR, accountants, and tax experts on the same page.

As a startup, if you don’t have access to all the relevant specialized individuals, you should exercise even more caution and take your time to process payroll tasks. Founders often find out later that setting and managing payroll is not as easy as they thought it would be at the start.

If you have a finance background, it will help you get familiar with various concepts of the payroll process and management. Here’s a simplified version of you can set up your payroll process:

Step 1: Get your EIN

Make sure you have your Employer Identification Number set up as a prerequisite to starting your payroll processing. In addition, you'll need to register your startup in states where you conduct business or plan to hire employees to understand state-level tax implications.

If you don’t have one, you will have to apply from the IRS site.

Step 2: Collect Employee Data

Start to gather your employees’ data. Here's what you'll need:

  • Full name
  • Employment start or termination date
  • Tax filing number (Social Security number or TIN)
  • Date of birth
  • Current address
  • Compensation details
  • Form I-9 to verify employees’ eligibility for employment in the US
  • W-4 for employees or a W-9 for independent contractors

Step 3: Classify your employees correctly

Are you hiring full-time employees, part-time employees, or contractors? Classify your employees correctly so you can calculate and withhold the right amount of taxes.

Unsure about how to classify your employees? IRS can help you out by filling out Form SS-8.

Step 4: Determine your pay periods

This will be usually mandated by state laws. Most states push for bi-monthly payments. Check what is required of the states you operate in and set your pay periods accordingly.

Step 5: Draft and File Tax Forms

You need to prepare the annual W-2s of your employees and file your tax returns for each quarter. Collect and keep your employees' W-4s on file so you know how much federal income tax to withhold.

Step 6: Calculate taxes to be withheld

Next, calculate the amount of taxes that will have to be withheld from each employee’s paycheck. You can submit tax deposits on the local, state, or federal level on a monthly basis. 

Step 7: Set up a payroll system

Set up a payroll system that works for you. Check out our guide to the top 10 payroll software that are best suited for startups.

Summary

In the early stages of a startup, payroll processing often comes across as a daunting task. If you don’t want to make the process more complicated than it already is, create a plan of action and identify the unique elements that might have an impact on your payroll process.

As a startup, you shouldn’t feel reluctant to seek out professional payroll management services. If you’re planning to hire more employees, the wise thing would be to set up a dedicated payroll process system.

Having a flawless payroll process is the best way to avoid hefty tax penalties and issue checks without delays. An efficient payroll process will keep your startup finances organized.

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.

If you're looking for help in setting up your payroll process, drop us a note at hello@abstractops.com. We can help you select the right software and set of processes for your needs.

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Note: Our content is for general information purposes only. AbstractOps does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.