The entire concept of payroll appears to be deceptively simple for an outsider, as it basically denotes a process by which an employer pays an employee for work performed. But just a little scratch on it will reveal that it’s not just about signing a check and sending it to the concerned people. There is much more to it. An employer has to ensure that the proper taxes are withdrawn from each paycheck and that those funds are going to the right government agency at the right time. A slew of complicated tax forms must be properly filled out before deadlines expire. Not doing so may put you under severe fines- or even in jail. If you are a fledgling setup and the count of your employee strength doesn’t exceed beyond 4-5, you can still harp on the old ways and sit in a corner with calculators to take care of these things. But as your organization begins to swell up, it becomes almost impossible to stick with those archaic ways. Just to understand the importance of a payroll for a small business, look at the following scenario.

In the United States, every new employee must be reported to the state along with a completed W-4 tax form. It clarifies how many allowances the employee qualifies for when calculating the federal income tax that should be withheld from each check. Generally, it’s the first form that employer has to keep in his payroll system. Note that he has to keep this form on file up to four years after the employee is fired or quits. As deducting taxable income is one of the main functions of payroll systems, an employer must ensure following withdrawals:

  • Federal income tax
  • State and local income taxes (where applicable)
  • Social Security tax
  • Medicare tax

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When an employer withholds taxes from a paycheck, he acts as the trustee for those funds until they are paid to the IRS, the Social Security Administration (SSA) or other government agency. To have a clear-cut distinction between profits and this tax amount, all withheld taxes must be held in a separate bank account or trust fund. Moreover, an employer has to pay federal and state unemployment taxes (FUTA and SUTA) for each employee. Apart from these palpable deductions, there are many other possible deductions which need to be tracked by the payroll system:

  • Health insurance or life insurance premiums
  • 401(k) or other retirement fund contributions
  • Workman's compensation
  • Union dues
  • Vacation days
  • Sick days
  • Employee loans
  • Court-ordered wag¬e garnishments (for outstanding debts)
  • Child support payments

That’s not all yet. As year-end approaches, every firm has to take wage and withholding information from the previous year and summarize it on a W-2 form for full-time employees or a 1099 form for contract workers. Employees, the IRS and the SSA should get the required copies.

Clearly, keeping track of these withholdings, paying all pertinent employment taxes and still mailing the paychecks on time can exert a considerable burden on mid-size employers- especially when they are on their own without a tacit assistance of robust payroll system. Instead of focusing on customer service, product development and sales funnel, they will be buried under the pile of IRS forms all the time. That’s precisely why payroll for a small business slides down from the top of being luxury to become a burning need.

Importance of Payroll for a Small Business

How Payroll for A Small Business Works


A) Next-Generation Approach:

A well thought out payroll system may give rise to Next-Generation Approach which is marked by new capabilities and cutting-edge features. By separating processes like payroll reporting from payroll calculations with the effective use of cloud, companies, as well as vendors, can alter batch processes that once took hours to complete to a real-time view of payroll status at any point in a pay cycle. Riding on this, companies can adopt practices like same-day pay for hourly workers. To some industries, it may prove as the most lucrative spot as far as retainment and recruitment are concerned. It shouldn’t go out of radar that it is taking off the admirative pressure from HR teams along with a heightened employee experience.

B) Compliances:

Gone are the days when national and international regulatory requirements used to affect only larger companies. Rapidly growing globalization has made it a thing of past. Companies now have a pan-continent or cross-continent presence and that’s where the need to comply with the stringest regulations of multiple countries arise. Recently enacted General Data Protection Regulation (GDPR) is its prime example. And according to Stacey Harris, vice president of research and analytics with HR technology advisory firm Sierra-Cedar, such data privacy laws may be introduced around the world in coming years. Since different countries have different compensation modes and rules, like strict overtime pay regulations for the Labor Law of the People's Republic of China, every payroll process carries the risk of betraying those rules. In fact, Bloomberg has stated that 60 percent of international organizations report "increased 'risks and regulatory requirements'" when managing compensation on a global scale. A payroll system can significantly reduce this too-common jittery air, as payroll software gets automatically updated whenever a tax or other important regulations change and will remind employers about the same. In short, without a global payroll system, which can house the data collection requirements (or storage regulations) in each different country, the risk of non-compliance will be hard to weed out.

C) Strategic Planning:

If used properly, payroll systems can become a back-end tool to chalk out strategic decisions. Note that it gives valuable insights into employees' behavior, as it records attendance, extra hours that every employee has put in, and leave patterns. It enables management to analyze the worth of an employee in terms of dedication and attitude. Besides, unpredictable changes in costs and rates always prove hurdles in calculating accurate payrolls. Implementing payroll for a small business waves off this spot of concern by offering mid-period rate changes and doing the calculations on your behalf. Once these calculations get verified, they can be forwarded for future transactions.

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In A Nutshell:

There is not even an iota of doubt that the early implementers of payroll for a small business will find themselves amidst the bevy of benefits. However, these benefits aren’t just restricted to enhanced administration and accounting capabilities. One has to understand that mere sales number and revenue charts aren’t enough to make your company a respectable and desirable one. A lot many factors contribute to it, and effective payroll system is one among them. It’s because payroll department is the organization’s shop window. Even a cursory glance at your payroll process reflects company's culture, branding, and financial stability. It’s also a prime indicator of any company’s commitment towards its employees’ wellbeing. That’s why payroll is too important a department to overlook!