Why Payroll Matters to Your Startup

According to a recent survey of 869 entrepreneurs, 74 percent were concerned about hiring good people. And, once you find the talent you’ve been looking for, you’ll want to do everything in your power to keep them — including paying them accurately and on time.

Trust is a valuable currency

One unspoken, yet pivotal, aspect of payroll is trust. The employer trusts that the employee will apply their talents and, in return, the employer will compensate the employee. This arrangement has stood the test of time from farmhands in an agrarian culture to tech workers in a digital world (and everything in between).

Another factor that’s remained constant is that income equals survival. In its 2017 “Getting Paid In America” survey, the American Payroll Association found that more than one third of workers would struggle to meet their personal financial responsibilities if their paychecks were delayed by as little as a week.

A late or inaccurate paycheck is a violation of trust, a thought that’s validated by findings that show that up to 25 percent of workers will begin exploring other opportunities after one mistake. This number nearly doubles to 49 percent (close to one half) of workers after a second payroll mistake.

Related: 3 Small Business Payroll Myths Debunked

No one is born a payroll expert

In all fairness, the vast majority of entrepreneurs have nothing but the best intentions when hiring employees. The problem is that while payroll seems so simple on a conceptual level, this core component of business is often fundamentally misunderstood.

With all the hats you wear when you start your own business, it’s no surprise that the average business owner isn’t a payroll expert. Raise your hand if you were ever taught about the ins and outs of running payroll in school, anyone? Pay groups, income types, deductions and contributions not your first language? (Bookkeepers and accountants, you’re the exception to the rule. Also, no one likes a showoff).

Luckily, technology, namely cloud-based, software as a service (SaaS) applications have helped level the playing field for small businesses and startups. This democratization means that the financial tools once reserved for large businesses can now be leveraged by even the smallest and youngest businesses.

Time is money

A primary benefit of SaaS technology, especially small business payroll, is automation. Processing payroll manually is extremely time consuming and the average small business can spend up to 120 hours a year (10 hours per month) on this task. Then there’s the fact that the more employees you add, the more complex your payroll gets.

Automating calculations, like multiplying hours with rate of pay or breaking a set salary across a specific pay schedule helps saves time and prevent mistakes. For example, a study by Software Advice found that payroll software can help shave payroll processing time down from 11 minutes to a mere 1 minute and 30 seconds per employee. A similar study also found that payroll should be one of the first human resource (HR) technologies in which a new small business or startup should invest.

The taxman cometh… even to your payroll

What comes as a surprise to a lot of entrepreneurs is the realization that the employer is responsible for processing income and payroll taxes for every employee, every time payroll is run.

In the United States, income tax is a pay-as-you-go tax, meaning the employer withholds the appropriate percentage of income tax from each paycheck. Taxes for federal, state and local social programs (known as payroll taxes) are handled the same way. Contributions for Medicare and Social Security are split evenly between the employee and the employer, while federal and state unemployment taxes are paid in full by the employer.

On top of processing income and payroll taxes with each pay cycle, income and payroll taxes also have to be regularly reported and paid to the appropriate tax authorities.

At the end of the year, employers also have to generate tax documents, like employee W-2s and other key reports. There are also hard deadlines for all these things. For example, the deadline for filing W-2s is January 31.

Payroll software helps automate a vast majority of this process from basic calculations to paying and reporting to the appropriate tax authorities.

One in three small businesses are penalized for payroll mistakes

The headline-making statistic can be found in the Inc. Payroll Services Guide where it’s used to make the case for using payroll software.

Not only are are small businesses and startups the largest segment of noncompliant taxpayers (most likely to be on the naughty list), the owners/founders themselves can be held liable (regardless of business structure). Even when you’re using payroll software, the software itself is considered a tool and the expectation is that the business is aware of and ultimately responsible for complying with income and payroll tax regulations.

Reading that the business owner is held responsible is probably causing you to ask, “If I’m still liable, what’s the point of using payroll software?” The answer is that using payroll software will help lower your risk for mistakes. It also shows that you’re acting in good faith.

If, for some reason a percentage was off, the Internal Revenue Service (IRS) or state tax authority is going to be a lot more understanding if you had the proper processes in place and were making an honest effort to do the right thing. However, if you never even tried at all, that’s a totally different scenario.

Yikes! What if I just use contractors and freelancers instead?

You could, but you still have to pay them. Then there’s the fact that if you pay a contractor or freelancer more than $600, you have to issue a 1099 (the contractor’s version of a W-2) at the end of the year.

Believe it or not, there are also specific standards that determine whether someone is classified as an employee or contractor. If it’s found that you misclassified an employee as a contractor, you would be responsible for going back and catching up on all the applicable payroll taxes.

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Payroll is a foundational business function

From the trust you build with your employees to the avoidance of fines and other negative repercussions, payroll is one of the building blocks of your business processes. It’s not glamorous like scoring that first big sale or landing a key client. Instead, it’s like doing the dishes. If you let things pile up, things can get messy very fast.

The best thing to do is to make sure you’re doing everything correctly right from the start. This can mean working with an accountant or bookkeeper or simply educating yourself. (Although given the intricacies, a quick consultation with a professional might save you significant amounts of time). Even if you are your only employee, getting your payroll right will make a world of difference. 

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