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10 payroll tips for small business owners

10 Payroll Tips for Small Business Owners

As a small business owner, you have to decide between outsourcing payroll and doing payroll in-house. This is something that small business owners deal with every day, and there are pros and cons to each. With that said, here are ten tips for business owners to keep their payroll on track and in compliance with the IRS.

1- Properly classify workers
Make sure you properly classify your workers. Just because a worker agrees to be paid as an independent contractor doesn’t mean it’s legal. If the worker is performing the same services that are offered by your business, the person usually has to be classified as an employee. Like anything tax-related, there are exceptions to this.

2- Consider outsourcing your payroll
Shy away from doing your own payroll. First and foremost, unless you have an accounting background, you probably don’t know all the rules involved. So let an expert take these payroll requirements off your plate and ensure you are playing by all federal, state, and local rules. There are hefty penalties for filing your payroll tax returns late or not providing adequate withholding deposits when they are due. Avoid these traps and stay current by letting an expert handle it on your behalf.

3- Obtain an EIN and give it to your payroll processor
You must have an Employer Identification Number (EIN)for payroll purposes. If you operate a corporation or partnership, you should already have an EIN. If not, you must obtain one from the IRS to use for payroll processing and payroll taxes.

4- Classify your employees/contractors correctly
Do you have 1099 independent contractors working for you? Do you have W-2 employees on staff whom you pay benefits like health insurance? Make sure you classify all workers on your team correctly when doing your payroll and covering your payroll taxes. These work statuses can have a notable effect on payroll processes.

5- Consider offering fringe benefits to reduce your taxes
Giving a raise to a deserving employee is nice. However, it automatically increases your payroll and payroll tax bill. So why not offer fringe benefits instead? The good thing about fringe benefits is that they are tax-free in many cases. They include dental and vision insurance, a company smartphone, and a retirement plan.

6- Maintain an up-to-date profit and loss (P&L) statement
A profit and loss statement helps small business owners maintain a good handle on their monthly budgets in terms of how much money is coming into the business and how much is going out. This information is valuable when determining your payroll taxes, and it can help you find ways to reduce certain business expenses as well.

7- Consider maintaining a second business bank account for payroll
In order to set aside money to cover your payroll and payroll taxes, it’s a wise idea to have a second business bank account specifically for this purpose. This will guarantee that you have enough funds on hand separate from your regular business funds to cover these required payments.

8- Make federal tax deposits for payroll taxes each time you issue payroll
By doing this, you can ensure that the money you put toward covering payroll taxes is applied correctly. There are large IRS penalties for failing to pay your payroll taxes on time, but there’s no rule about how often you can make these payments. Then, it is better to be forewarned.

9- Remember that technology isn’t perfect
If you choose to do payroll in-house, remember that technology isn’t perfect. Payroll software is fantastic and will make your job easy, but don’t rely on it with full faith. Make sure to review numbers and reports to ensure accuracy and compliance. Hiring an outside payroll company eliminates this, as companies have systems in place to ensure accuracy. Payroll companies also make it a point to keep up with laws and changes, so you can rest assured knowing your payroll is being done correctly.

10- Ask your payroll company to automatically make tax deposits
If you’re outsourcing your payroll, ask your payroll processing company to automatically make the federal and state tax deposits for you. It will be one less thing to worry about, and you know you’ll be in compliance. Not keeping up with payroll taxes can get expensive very quickly.


It's a Social Media and digital marketing consultant and owner and founder of He is also author and entrepreneur. He helps small businesses to grow, get clients and generate income.

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