How Does Small Business Payroll Work?

Small Business

How Does Small Business Payroll Work?

Published on January 31, 2018


A small business does many things differently than a large corporation. For one thing, due to the size and demands of the company, corporations have separate departments to handle administration processes like bookkeeping, budgeting, and inventory management. A small business company owner, however, quickly learns his or her limitations in time and resources, especially for functions with many moving parts like small business payroll.
Each year, the Internal Revenue Service (IRS) issues a penalty to one out of every three businesses for payroll errors, according to the Inc. website. A common problem that cuts deep into the bottom line for small business owners who could have avoided these problems by using payroll services.
Payroll is a time-consuming process, and rushing through it could mean data entry errors and incorrect tax and salary calculations – either costing the business what could be profit or opening it up to liability by accidentally shorting employee pay. Consider the benefits of hiring a service for your small business payroll, and get some tips for finding the right type of service for your small business.

Common payroll errors

It isn’t that hard to sit down and calculate payroll basics like salary. Usually the problem is the more complex functions like figuring out the small business payroll taxes. Also look out for health insurance and complications like wage garnishments. These all factor into the small business payroll system.
Misclassifying workers, for example, is a hot-button audit topic for most people responsible for a small business payroll, according to the U.S. Small Business Association. To avoid the complication of doing payroll, some companies might classify their workers as 1099 independent contractors responsible for their own taxes. It seems like an easy way out but the misclassification of an employee as an independent contractor is a serious issue that could dramatically change your business taxes and create problems with the IRS and other government entities.
The IRS will also expect the small business payroll manager to keep detailed records available at any time for review. This includes the trust fund that holds money taken out of an employee’s check for withholding.
Payroll is a huge responsibility and your company is liable for all of it. A small business payroll service can do the legwork for you and will often take on the recordkeeping burden at the same time, even if it means handling an IRS audit, saving you time and closing off liabilities

What to look for in small business payroll services

It doesn’t take long for most small business owners to realize the benefits of having payroll services, but how do you find one?

  • Ask around — Referrals are the small business owner’s best friend with it comes to payroll services. Talk to your CPA, vendors and other third-party services to see which service they use and how they’ve handled complicated issues in the past.
  • Go online — Once you get a short list together, go online and do some research. Look for customer reviews and see if employees from companies that use this small business payroll service have any complaints. A good payroll service will pay both taxes and employees on time, every time.
  • Consider the cost — Look carefully at what you are paying for with each different payroll company. Companies with just one or two employees might do well with a larger service available online. A business that has more complex needs might want a local small business payroll service, though, for more individualized attention. Make sure to take into account any add-ons, too. Some payroll services charge extra for W-2s, direct deposits and online time tracking.
  • Consider the convenience factor — What does your business want to get from a payroll service? Do you want online input? Maybe you prefer to send the data to the company and have them input it? What kind of records do you want to see online? What about hard copies and reports? Consider your specific payroll needs, and have these in mind as you shop for a service.

Before picking a small business payroll service

You know that you want to use a payroll service, and you know what you’re looking for—so now what? Before making the final selection, arrange to talk to someone and ask questions like “What happens if the small business payroll service makes a mistake?” “Who is responsible for the following work to fix the issues? What do they do if there is an IRS audit”?, and “Are there any fees you might not know about, like a charge for integrating accounting software?”. Consider a test drive, too. Go through at least one or two pay cycles before signing any long-term contracts.
With your small business payroll handled, you can move on to other pressing issues like finding affordable small business health insurance on
This article is only for general information and is not tax, legal, or accounting advice. Consult your tax, legal, or accounting advisor for guidance.

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