27 Tips for Managing Payroll Effectively

Payroll management is a system for processing employee paychecks (salaries, bonuses, deductions), complying with labor laws, and maintaining adequate documentation. In 2022, the IRS levied nearly $15 billion in civil penalties for non-compliance with employment taxes—most of which can be easily avoided with efficient management processes. That’s why it’s important that businesses learn how to manage payroll effectively, as it directly affects their financial health.

Here are 27 of the best payroll tips to keep in mind, broken down into the segments of the payroll process for efficient management.

Payroll Basics

1. Stay Updated on State and Federal Tax Procedures

Employers need to stay on top of their tax obligations and any changes in state and federal reporting requirements. Changes can occur for various reasons, including business relocation, employee relocation, and hiring remote employees. When this happens, it’s the employer’s responsibility to gather and update the information it needs to compute payroll and taxes accurately.

Businesses should have employees submit a W-2 Form and file it with the Social Security Administration by mid-April of each year. Doing this helps the payroll department keep up with the changes that affect federal and state deadlines and calculate and correct hours, wages, tax holdings, and benefits. Failure to pay employer- and employee-withheld taxes accurately can result in penalties.

2. Understand Labor Laws

These laws, which cover minimum wages, overtime pay, working conditions, and more, can significantly impact your payroll process. Ensuring compliance is not just about avoiding legal trouble—it also contributes to a fair and transparent workplace.

In today’s remote work environment, this becomes even more complex. You may hire employees who reside in different states, each with its own specific labor laws. For instance, the Fair Labor Standards Act (FLSA) sets federal standards for minimum wage, overtime pay, and record-keeping. However, some states have their own regulations that exceed federal standards, such as higher minimum wages or stricter rules on breaks.

Staying updated on these laws, especially when managing a geographically dispersed team, can be challenging, but it’s essential. Use resources like the Department of Labor’s website, webinars, or consult with a labor law expert to ensure you’re compliant. By thoroughly understanding labor laws, you can navigate the complexities of payroll in a remote work era, safeguarding your business and treating your employees fairly.

Payroll Planning

3. Create a Payroll Calendar

Payroll calendars help employees understand when they will be paid and when timecards are due. It also helps your payroll staff with planning and executing payroll tasks.

An effective payroll calendar should show all pay periods for the year. This simplifies payment processing and reduces employee confusion about when they will be paid and the time frames their paychecks will cover. Once you create a template for the calendar, save it on your hard drive so you can update it when needed.

Here are some guidelines to follow when creating your own payroll calendar:

• Use a regular calendar as your guide to help analyze certain dates that might require a lag to allow enough time for payroll processing.
• Use colored fonts to emphasize specific information, such as early time card deadlines due to a holiday.
• Give managers and supervisors a copy of the calendar so they can distribute it to their employees.

4. Set Up a Robust Payroll Budget

Your payroll budget should include not only wages and salaries, but also other expenses such as employer-paid taxes, benefits, bonuses, and overtime pay. It’s important to forecast these expenses accurately to prevent any unexpected shortfalls.

To do this, start by reviewing your historical payroll data. Make adjustments based on factors like planned hiring or potential wage increases. Regularly review and update your payroll budget throughout the year as well. This allows you to stay on top of changes and make necessary adjustments, ensuring your business remains financially stable.

Check out our guide to creating a payroll budget for a deeper look into this process.

5. Plan for Year-End Tax Reporting

As the end of the fiscal year approaches, you’ll need to prepare W-2 forms for your employees and 1099s for any contractors. These forms summarize each individual’s earnings and tax deductions for the year and need to be sent out by Jan. 31.

Start planning for this early. Review your payroll records to ensure they are accurate and complete. If there are any discrepancies, resolve them before the year ends. Also, set aside time in January to process these forms. Remember, accurate year-end tax reporting is not just a legal requirement; it’s also crucial for maintaining good relationships with your employees and contractors, who need these forms to file their personal tax returns.

Streamlining Payroll Process

6. Automate Your Payroll Process

Processing payroll takes a lot of time and money, and when done manually, is easily susceptible to mistakes that can result in severe penalties. This is especially true for a growing business that has a steadily increasing number of employees.

With limited HR and payroll staff, payroll processing can become a challenge. Automating your payroll process is the easiest way to keep up with time-consuming tasks.

7. Implement a Dedicated Payroll Software Solution

Such software automates calculations, reduces errors, and saves time. It can handle tasks like tracking hours worked, calculating taxes, and managing deductions.

When choosing payroll software, consider factors like its ease of use, scalability, and whether it can integrate with other systems you use, such as HR or accounting software. While there’s an upfront cost, the long-term benefits in terms of time saved and reduced error rates can be significant.

If you’re interested in using software to help you better manage your payroll process, consider Rippling, one of the highest user-rated software on the market. Rippling is an HR management software that allows you to manage your employee payroll, benefits, third-party apps, and much more all in one place. Rippling makes managing your employees simple. Plus, if you sign up for its solutions and services, you get the first month FREE!

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8. Use Employee Scheduling & Time Tracking Software

Accuracy is important when processing payroll, and it all starts with properly monitoring employee attendance. Even the simplest error can create problems that result in significant civil penalties and poor feedback for the business.

Using employee scheduling and time tracking software will help save time, increase efficiency, and improve your payroll staff’s productivity, which ultimately ensures the accuracy of your payroll reports. Look into our roundups of the best employee scheduling and best time tracking software for some options.

9. Encourage Direct Deposit

Encouraging your employees to opt for direct deposit can also make your payroll process more efficient. With direct deposit, wages are transferred electronically into each employee’s bank account. This eliminates the need for paper checks, making the process faster, more secure, and environmentally friendly. Learn how to set up direct deposit for your employees in our guide.

Communicate the benefits of direct deposit to your employees—it’s convenient, they get their pay faster, and it’s more secure. Implementing this change cannot only streamline your payroll process but also improve employee satisfaction.

10. Offer Flexible Payment Options

Offering flexible payment options is another way to streamline your payroll process. Different employees may have different preferences—some might prefer weekly payments, others biweekly or monthly. Some might prefer direct deposit, while others might want a check or even a payroll card.

By offering a variety of payment options, you cater to these differing preferences and ensure that all employees receive their wages in the manner that works best for them. This can lead to increased job satisfaction and reduce the time you spend addressing payroll-related questions or issues.

11. Use Cloud-Based Payroll Systems

These systems allow you to manage payroll from anywhere, at any time. They offer real-time data access, automatic updates, and secure data storage.

Cloud-based systems can also integrate with other business software, providing a more cohesive view of your business operations. This can be particularly beneficial in today’s remote work environment, where you may be managing payroll for employees spread across different locations. By leveraging the cloud, you can make your payroll process more efficient, flexible, and resilient.

Managing Payroll Staff

12. Allow HR Staff to Attend Payroll Training

While processing payroll is part of a human resource (HR) professional’s training, their expertise is more focused on recruitment and employee records management.

To improve your business’ payroll management process, however, consider organizing payroll training sessions for your HR staff. Although the HR and payroll departments have distinct roles in an organization, they share functions crucial for a business’ success.

Some benefits of providing payroll training for your HR staff are:

• Improves collaboration: Many payroll issues are related to HR, so working together would help the payroll and human resources departments use their shared knowledge to come up with more innovative solutions.
• Reduces manual/double work: You can reduce the amount of paperwork your staff prepares by consolidating some reports; it can also simplify processes.
• Creates a more cohesive team: If your HR staff has a broader understanding of your payroll team’s procedures, they will be more sensitive to the time devoted to payroll processing.
• Prevents conflict: Payroll training will help prevent misunderstandings between your HR and payroll workers and give all employees more clarity on payroll policies.

Your HR team’s deeper understanding of payroll policies will help diffuse some of the payroll staff’s pressure when communicating with employees. This eventually improves working relationships and boosts the overall mood inside the office.

13. Distribute Payroll Duties Among Your HR Staff

If one or two payroll processors are having problems processing payroll in a timely manner, consider reallocating their payroll duties. You should document this change of duties and create or update your written payroll policies so the new process is communicated clearly.

It’s also a good idea to review the new processes and policies regularly. Separating payroll tasks will not only relieve some stress from your individual payroll staff but should help with meeting deadlines, handling volume, increasing accuracy, and preventing fraud.

Payroll responsibilities that should be performed by multiple people versus one include verifying and processing changes to payroll and personnel data, approving payroll journal entries and changes, reviewing and approving monthly payroll reports, and distributing paychecks.

14. Hire Qualified Payroll Staff

Payroll staff must be able to handle the demands of their job, or they risk making errors, incurring costly payroll compliance penalties, and ultimately, experiencing job dissatisfaction.

It is therefore crucial for businesses to build a payroll team with the skills required to handle the level of payroll tasks your company needs. Keep in mind this refers to candidates with glowing credentials and also someone who can learn quickly and adapt to your work culture.

There are no essential “industry standard” qualifications for personnel entering payroll positions, but you can always look for relevant payroll accreditations that prove their math skills.

Meanwhile, experience, adaptability, and integrity are also important qualities. Hiring the right payroll staff ensures all your business’ payroll responsibilities will be taken care of, so being able to identify candidates with the right skills can make all the difference.

Payroll Policies and Procedures

15. Standardize Turnover Processes

A big reason payroll staff turnover is painful is that all companies have their own unique payroll processing intricacies; these small details can take significant time for new hires to learn. To minimize the negative effects of losing team members to other companies, moving them to different roles, and temporarily filling positions when employees go on leave, you should consider ways to standardize your turnover process.

Some of the ideas you can implement to make your internal and external turnover process go smoother are:

• Promote internally: Consider promoting internally first to help minimize the learning curve of new hires.
• Implement a buddy system: Use a buddy system where each payroll team member trains another on their task.
• Maintain standard process/role documentation: Include a process flow chart and schedule in your payroll system documentation to help make managing roles easier when promoting payroll staff in the company.
• Update payroll templates: Always update your payroll templates and save them in a drive accessible to everyone on your payroll team.

Creating a standard payroll process will improve your payroll team’s productivity. It can also lower your risk of making payroll mistakes, making your payroll department more reliable.

16. Document Your Payroll Process

Documenting your payroll process is an important step in managing payroll. This strategy helps when analyzing and auditing your payroll system as it highlights each step and makes it easier to identify weak points in the process. Once you develop a payroll process that works best for your business, document these procedures and share them with the payroll team to help ensure each payroll staff member understands their role.

Maintain a standard payroll processing manual for the payroll department. This should include all the payroll processing steps as well as the reporting and check-handling processes. It will also be useful to have instructions on how to process payroll manually in case of emergencies.

Document the steps for printing and filing payroll registers and tax reports, along with the names of the individuals to whom you will be handing the paychecks and pay stubs.

17. Regularly Review and Update Payroll Procedures

Your payroll policies should cover key areas such as pay periods, overtime, deductions, and how errors will be handled. These should also specify who is responsible for each step in the payroll process.

Payroll procedures should not be static. Regularly reviewing and updating them is crucial to keep up with changes in tax laws, labor regulations, and business needs. For instance, if you expand your business to a new state, you’ll need to adjust your procedures to comply with that state’s tax laws.

Set aside time each quarter or at least once a year to review your payroll procedures. Look for any changes in the legal landscape, as well as opportunities to improve efficiency. This proactive approach can help you avoid compliance issues and make your payroll process more efficient and effective.

18. Solicit Feedback About Payroll Procedures From Employees

Never assume that employees fully understand your company’s payroll procedures. Make it a point to ask and encourage employees to ask questions as well.

Communication will help identify areas of misunderstanding such as improper time sheet submission or issues in the use of timecards. Inviting suggestions on improvement will encourage support from your staff after changes are implemented.

Start by holding an all-staff meeting dedicated to payroll issues. Employees will likely want to participate, as everyone is directly affected by the process. At this meeting, ask employees what payroll processes work for them and what areas need improvement. You may be surprised by the creative suggestions you receive. You should also consider issuing a companywide survey to determine the level of employee satisfaction with current procedures.

Payroll Compliance and Auditing

19. Avoid Borrowing From Payroll Tax Funds

It might be tempting to dip into your payroll tax funds if your business is short on cash. However, borrowing from your tax fund would be a serious mistake that you should avoid at all costs.

In running a business, poor decisions like this can easily be overlooked until it’s time to process your payroll tax payment. You could end up not having enough money to replace the borrowed funds and risk not being able to pay the IRS.

Consider opening a separate payroll bank account for your collected and contributed taxes. This will help ensure you don’t use your payroll taxes to pay for other business expenses. You can also create a cash reserve for your business. If you become short on cash, you can access your emergency funds rather than payroll tax funds.

20. Ensure Compliance With the Equal Pay Act

The Equal Pay Act requires employers to pay all genders similar wages for similar work. The jobs need not be identical, but they must be substantially equal in skill, effort, responsibility, and working conditions.

To comply with this law, review your pay practices regularly. Ensure any pay differences between employees performing similar jobs are based on factors other than gender, such as experience, education, or performance. Keeping detailed records of these factors can help you demonstrate your compliance in case of an audit or lawsuit.

21. Audit Your Payroll Process

It’s not unusual to hear of occasional complaints about payroll computations. However, frequent incidence is a clear indication of the need to conduct regular audits of the entire payroll process. This is especially true for companies that still use a manual timecard system as they are exposed to high risk for discrepancies.

Automated systems can also be affected by data entry errors like incorrectly recording a new employee’s tax status (married vs single) or entering old pay rates.

Steps you should follow to ensure an effective audit include:

• Verify and reconcile the accounting, payroll, and cash documentation to make sure the dollar values match across all records.
• Test plugins or add-ons to ensure that payroll software is properly integrated with your time and attendance system.
• Install a check-in system and/or biometric sign-in hardware to automatically note the times an employee logs in for work.

If employees raise concern about or have difficulties complying with payroll policies, then it’s time to review your policies (and documentation) for accuracy and clarity. Employees must understand their role in the payroll process to complete tasks like time sheet submission or timecard use properly and on time.

Check out our guide to doing a payroll audit to help you evaluate your payroll process.

22. Be Prepared for Payroll Audits

Payroll audits can be conducted internally or externally, by entities like the IRS or DOL. Being prepared for these audits is key to managing them efficiently and minimizing disruption to your business.

Maintain accurate and organized payroll records, including time cards, pay stubs, tax forms, and documentation of any deductions. Regularly review these records for accuracy. If an audit does occur, cooperate fully with the auditors and provide all requested information promptly. By being proactive and prepared, you can navigate payroll audits with confidence and ease.

Onboarding and Employee Data

23. Complete Onboarding Paperwork on Time

Make sure you and new hires complete all the employment forms you’re legally required to submit. These forms will provide you with new hire data so that you properly classify and compensate employees. Legislation may differ based on your state or county, so make sure you check your state and county websites in addition to federal for all paperwork and deadlines.

The most common types of employment forms employers are expected to complete are:

• W-4 Form (or W-9 for contractors)
• I-9 Employment Eligibility Verification Form
• Direct Deposit Authorization Form

Additionally, if you offer employee benefits, you will need to give each new hire paperwork that describes the terms and conditions of those benefits and, in some cases, request that they sign.

Onboarding documents are important to complete when new employees start working for you, and they’re crucial to ensuring you manage payroll correctly. It’s best to create an onboarding schedule that will help you complete these forms on time so you avoid errors in the future.

24. Ensure Data Security

Payroll data includes sensitive information like Social Security numbers, bank account details, and home addresses of your employees. Any breach of this data could have serious consequences for your employees and your business.

Implement strong security measures like encryption, secure login procedures, and firewalls. Regularly update your security software to protect against new threats. Train your employees on data security practices, such as recognizing phishing attempts and using strong passwords. By taking these steps, you can safeguard your payroll data and maintain the trust of your employees.

25. Backup Your Payroll Data

Regular backups of your payroll data ensure you have a recent copy of all data if needed.

You might consider using a cloud-based payroll system, which automatically backs up your data and allows you to access it from anywhere. Alternatively, you could manually back up your data to an external hard drive or another secure location. Regardless of your method, make sure to back these up regularly and test your backups to ensure they’re working properly.

Transparency and Outsourcing

26. Observe Transparency in Your Payroll Process

Problems often arise because of employee misunderstandings of the payroll system. This happens most often in organizations where pay policies are either not accessible or inadequately presented to employees. Many payroll issues such as underpaid taxes or employee misclassifications (contractor vs employee) can be corrected by instituting a wholly transparent payroll policy.

A transparent payroll policy should include information on:

• How the payroll process works
• How employees are classified
• How salaries are determined
• Employee reporting responsibilities
• Company procedures for handling payroll mistakes
• Levels of vacationable earnings (earnings on which vacation pay is calculated)
• How wages and promotions are calculated

Put the policy in writing, display it prominently throughout the workplace, and ensure each employee has a copy. You should also update your employee manual accordingly.

27. Outsource Your Payroll Tasks

It’s important that businesses are able to pay employees accurately and on time to avoid problems related to staffing. This can become overwhelming for a growing company in which tasks like payroll continue to take more time and effort.

Rather than managing payroll in-house, you can utilize one of the many payroll outsourcing options. Payroll software allows you to still be involved in the process without having to calculate paychecks and taxes on your own. If you use payroll software, you’ll be responsible for managing the system and processing each payroll; however, it will automatically do the calculations and file and remit taxes on your behalf so you don’t have to worry about it.

For a more hands-off approach, you can consider using a professional employer organization (PEO). A PEO acts as the employer of record for payroll and tax purposes. Depending on which provider you choose, you may still be the one pushing through the payrolls, but overall, PEOs will take most of the HR and payroll functions of your business off your plate.

If you’re not sure which one is the best solution for your business, consider using one that has the flexibility to change overtime. Rippling allows you to easily toggle between its traditional software and PEO solutions, making it a great solution for businesses as they grow and scale.

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Frequently Asked Questions (FAQs)

How do I handle payroll for remote employees?

Handling payroll for remote employees can be a bit more complex due to differing state tax laws. You’ll need to withhold and pay taxes according to the laws of the state where the employee works, not where your business is located. Consider using a payroll service that specializes in multi-state payroll to help manage these complexities, like Rippling.

What should I do if I make a mistake on payroll?

If you make a mistake on payroll, it’s important to correct it as soon as possible. Depending on the nature of the error, you may need to adjust an employee’s next paycheck or issue a separate check for the amount owed. Remember to correct any tax withholdings and filings affected by the error.

Bottom Line

Being able to accurately deliver employee paychecks is an immediate representation of your brand and signifies your ability to maintain high employee retention.

Make sure that learning how to manage payroll is at the top of your list for things to do well. By developing a payroll strategy that supports your culture, you’re guaranteed to stay on top of payroll tasks all the time.