The beginning of the year is behind us, but we still have a lot to look forward to. For one thing it means learning from last year’s mistakes and starting fresh. Chiefly, the payroll process is one area every business owner should focus on. These expenses are generally the largest portion of expenses and are related to many compliance rulings. For these two reasons alone, let’s take a broad look at some key areas of the payroll process.
Time is a key factor in the payroll process. Review the company’s policy for recording time.
First, errors can cost a company money and/or cause a company to be liable for noncompliance with labor laws. Make sure there are safeguards in place to minimize time recording errors. Make sure labor law posters in break rooms are up-to-date and have company meetings to ensure employees know the labor laws and the company’s timekeeping policies. Be sure to check out each state’s labor laws where employees live and/or work.
Second, errors can be costly by affecting data used to calculate job profits/losses and for creating quotes for future jobs. If time is not accurately recorded, labor costs will be difficult to decipher per job. A good way to determine how much time to quote for a future job is by analyzing the history. Inaccurate timekeeping, consequently, can lead to inaccurate quotes and could have a negative impact on the company’s profit. The more accurate the timekeeping process, the better the job cost data will be and quotes will contain better labor estimates.
Third, timekeeping is an extremely crucial area for government contractors. If you are a government contractor, make sure the Federal Acquisitions Regulations (FAR) for specific time keeping requirements are implemented. For a general overview, read the blog “DCAA Compliant Timekeeping”.
There are two main portions of payroll taxes; employers’ and employees’.
The employer is responsible for making sure payroll taxes are for both the employers’ and employees’ taxes. Recommendations are to hire a payroll company to help ensure the company is up-to-date on payroll taxes. However, this does not mean the employer has passed the responsibility to another company. The employer is still held responsible for ensuring payroll taxes are being withheld and/or paid correctly. Make sure to stay abreast of those specific tax laws and changes and ask the company for explanations. The IRS has an employment website with the basic employer tax requirements. There are also state payroll tax laws to be familiar with as well.
One crucial step for ensuring the correct amounts are withheld and paid, is documentation. For new hires, make sure to file and/or distribute to the payroll company all employment forms. These forms help to determine the amounts to be withheld and paid. Employees are responsible for updating any changes. Now is a good time to make sure all required forms are on file for each employee
Non-government contract companies should talk to an accountant to make sure payroll time records are accurate. For government contractors be sure to talk to a government contract accountant to ensure the payroll meets specific FAR requirements..
Other Payroll Items
Coupled with wages and taxes there are other payroll items to ensure are up-to-date. There are insurances, pensions, profit sharing, and other deductions. The employer could pay for these potentially expensive items. By the same token, an employer could incentivize them for new employees. For example, a company does not necessarily have to pay insurances so they can set up an insurance program whereby the employees pay the full premium amounts. The incentive for the employees is that this is often a cheaper route than purchasing insurance individually. Research what will work best for finding the right balance between expenses and employee morale. Furthermore, there are discrimination laws in place and pensions are regulated by federal laws as well. Make sure the pension plan meets the requirements. Again, be sure to hire a professional to maintain all of these, but remember, it is still the employers’ responsibility to be compliant with the law. Study the reports received and make sure to ask questions for anything that you don’t understand.
Given these points, this is a very broad overview of payroll topics. The key idea is that payroll is a large portion of a company’s expenses. Just because it is routine do not ignore it. Take time early in the year to review the company’s policies, federal and state tax and labor laws, and other deduction laws/regulations. Make sure documentation is up-to-date and at a minimum, review the payroll process and laws quarterly. In any event, talk to your payroll agent and/or other specialized companies, keep your accountant in the loop, and always ask questions throughout the year.
Contributed by Jamie M. Shryock, CPA