Payroll Best Practices To Implement Now


An efficient payroll process is crucial to business success. However, payroll isn’t always the most straightforward process to manage.

Due to the numerous regulations and compliance laws, payroll involves much more than simply tallying up hours for pay. Payroll procedures are complex and time-consuming, especially if you don’t have a good system.

That’s why we’ve compiled this list of payroll best practices.

Implementing these practices in your small business will reduce errors and save you time, energy, and sometimes even money.

1. Have a Handbook

Since the payroll process is so detail-oriented and the necessary procedures can shift drastically with one tiny change in circumstance, having a handbook for your employees to revert to is very helpful.

Employee payroll procedures and policies should be clearly defined in this handbook so that no question is left unanswered.

You may wonder why your HR or accounting department employees need a written book for something they were already trained to do.

The problem is that the process can be so complex that the details are hard to memorize.

This handbook will serve as a guide for refreshing their memory or just a checklist for payroll staff to look over before finalizing each pay period.

Not sure what to include in your payroll handbook? This article explains everything a payroll handbook should cover to ensure your payroll department is well informed and safe from fraud.

2. Classify Employees Correctly

As your company grows and the size of your staff increases, you may bring in various types of employees. For instance, you might bring in some 1099 subcontractors to help with certain tasks.

You are required to pay different payroll taxes depending on the classifications of each employee. Misclassification of an employee can result in penalties and fees from the IRS.

So, it is crucial that you classify each new employee correctly for payroll reporting.

There are seven common types of employees:

  • Full-time
  • Part-time
  • Temporary
  • Contract
  • Independent contractors
  • On-call
  • Volunteer

(Indeed has a great article on employee classification that breaks down each of these categories.)

It is also important to classify your employees as exempt or non-exempt.

Exempt employees are not legally entitled to overtime pay. Non-exempt employees must be paid overtime if they work longer than 40 hours. Exempt employees are paid a salary instead of an hourly wage.

According to the Fair Labor Standards Act (FSLA), this salary must equal out to at least $684 per week. Exempt employees’ duties must be either administrative, executive, or traveling sales.

Most of your employees will be non-exempt. They will work on an hourly basis, but they are also protected by the FLSA. You must pay these individuals minimum wage or higher and abide by overtime pay laws.

Note: Payroll may be the most important bill you have to cover. If you need capital to pay your employees, Now’s accelerated invoice payment solution can help.

3. Use Technology to Your Advantage

Woman sitting at a desk using a computer

If you are still working with paper employee timesheets and other manual records, you are setting yourself up for way more headaches than necessary.

We live in the digital age, and even if you are used to the old system, there is no denying the benefits of a completely electronic payroll system.

Benefits of Using Automated Payroll Software

Here are some reasons why an electronic payroll system may be a good investment for you:

1. More Protection

First and foremost, automated payroll processing can protect you against fines due to payroll errors.

If an employee claims that you didn’t pay them all of their earnings, this automated process can quickly prove otherwise. With manual payroll processing, you may not be able to provide enough proof.

2. Fewer Payroll Mistakes

Automation requires the use of payroll software, which will take time to learn. However, this software solution will make processing payroll much more efficient and accurate.

Most of the data and calculations are entered into the system automatically. This eliminates the chance of employees making errors in their calculations. They won’t have to worry about losing a timecard, either.

3. Integrate With Your Time Clock

Many payroll systems come with a time-tracking system or can integrate with your time-tracking system.

When implemented correctly, your payroll department and HR department will be able to see real-time payroll processing and employee timekeeping.

This will prevent miscommunication from occurring in both departments.

All employees can have access to the information. HR can add new employees’ tax information into an online template, and payroll processing is done with this information and employee hours.

4. Keep Your Employees Informed

Your employees can even access this system so that they can stay up to date on their hours earned, paid time off, and overtime. They can also check their schedule, request days off, and update their tax information.

Many companies even add the employee handbook and any FAQs to their payroll platform for their employees’ benefit.

5. Increased Efficiency

Automation saves a lot of time on both ends. The employee won’t have to fill out forms and time cards manually, and your HR employees won’t have to spend so much time on data entry.

Your payroll department won’t have nearly as much work to do, either. Their calculations will be done for them, and all they have to do is check for accuracy and approve payments.

Whenever possible, encourage your employees to sign up for direct deposit. Paper checks and pay stubs are a hassle to keep up with. They can get lost or stolen and are costly to reprint.

Related: Simple Small Business Solutions You Actually Need

4. Always Comply With the Law

This topic is a biggie in payroll. Without a doubt, payroll must meet federal, state, and local requirements, or you will face some hefty fines.

Save yourself a ton of money by making sure that your payroll system adheres to these laws in the strictest sense.

Tax Withholding and Reporting

When hiring a new employee, this individual must fill out a W-4 form to declare their tax withholding calculations.

Based on these forms, your business is responsible for reporting and paying these withholdings on a regular basis.

These state and federal taxes will cover social security, medicare, and unemployment costs.

There is a strict calendar to follow for employment tax due dates. Be aware of these dates, and make sure that you meet all deadlines.

Wage and Hour Laws

To protect workers, the FLSA made laws that regulate employee hours and pay. There are some federal laws that regulate these, but most are regulated on a state level.

Each state has different labor laws, so it is vital that you know which apply to your location or locations.

Check this list of labor laws by state to ensure you are in compliance. These laws cover things such as the minimum wage and required overtime pay.

Calculating overtime can get tricky. Quickbooks has a great breakdown of how to calculate overtime and how to avoid some common mistakes.


There are times when the government will step in and require that you garnish the wages of one of your employees due to unpaid child support, outstanding debts, or bankruptcy.

If you get a notice of garnishment from the Department of Labor, you must comply and remit this garnishment to the government.

Although this process can be annoying and incurs some fees, it is not legal to fire an employee so that you don’t have to deal with it.

However, you may be eligible for reimbursement from the government for any payroll fees incurred from this process.

Work Eligibility

If your business operates in the United States, you must ensure that every employee on your payroll records is eligible to work here.

They must provide two forms of documentation:

  1. A completed 1-9 form (which you’ll provide to them)
  2. Documentation of identity (Driver’s license, social security card, passport, or permanent resident card)

If you have any questions or concerns regarding the employment of an individual, contact the USCIS for more information.

Note: The employees in your human resources department who run payroll may benefit from some compliance education. The American Payroll Association offers many courses on this topic.

5. Implement Checks and Balances

Two men reviewing payroll on laptop

Payroll management is a huge responsibility that should be cared for by one individual.

Not only does payroll management come with a lot of work, but there is also a large sum of money being dealt with. When one person handles such a large account, the possibilities of fraud and theft increase exponentially.

Automated payroll software already diminishes much of the employee time theft possibilities, but now you must implement a checks-and-balances system for the payroll services themselves.

The payroll process should involve several people. If one employee is responsible for inputting the payroll data, another should finalize the pay period.

Supervisors should do all payroll audits on a frequent basis. Audits deter fraud, minimize errors, and ensure that you’re compliant with the law.

If you are the acting supervisor, there are a few things to look out for, such as ghost employees, correct pay rates, and outstanding tax liabilities.

6. Don’t Procrastinate

Waiting until the last second to fill out paperwork or file the necessary tax forms is the worst way to handle payroll.

In fact, putting yourself under that kind of pressure makes you more liable to make grave payroll mistakes.

Remember the calendar from the IRS we shared in section four? To make sure you remember all of those deadlines, consider setting notifications for yourself on your phone’s calendar app.

Of course, things happen, and if you need to, you can request an extension on your tax filing.

7. Be Sure You Always Have Enough Cash Flow for Payroll

One very wise habit for small business owners is to set aside enough to cover payroll before payday.

Saving up at least two to three pay periods worth of payroll can help to ensure that you always have enough cash flow to pay your employees.

Granted, there will come a time for every business owner when cash flow gets tight. So, how are you supposed to cover payroll in those situations?

One option is to get a small business loan. Or, you might do your best to collect any unpaid invoices.

Using an invoice factoring service can supply you with working capital to make sure workers are paid if you are having a hard time collecting these debts.

If covering payroll becomes an ongoing problem, make sure you aren’t spending too much on payroll. This article covers how to calculate how much you should be spending on payroll from your total revenue.

Payroll is the largest expense for most small businesses, but if your calculations reveal that your payroll bill is too high, you need to find a way to lower this bill.

One way to do this is to reduce the hours of some of your employees. You can also take a close look at the necessity of each employee. As hard as it may be, there may come a time when layoffs are needed.

Now can help you turn your unpaid invoices into working capital. Click the link to learn more!

Follow these best practices in your payroll process to ensure it is done right and to alleviate much of the stress involved.

The bottom line is that if you leave payroll functions unorganized, you may find yourself in quite a pickle. Fines and fees will start to rack up significantly, and you may even lose some of your best employees.

If you’ve implemented the practices above and you are still frustrated with your payroll process, outsourcing is always an option.

However, this requires that you find a payroll service company or a CPP that you can truly trust with your payroll.

And if you’re looking to speed up your clients’ invoice payments so that you have more working capital, contact Now.