How to Manage a Payroll

Payroll is a core function of your small business, because your tasks do not stop with simply giving your employees their paychecks. You must also comply with related federal, state and local laws. Failure to properly administer your payroll duties can lead to inaccurate paychecks and financial reports. Through effective management, you help to strengthen your payroll operations.


Choose a consistent pay period, such as weekly, biweekly, semimonthly or monthly. Examine your state’s minimum payday laws; you may pay more often than the law requires but not less frequently.

Payroll System

Your payroll system enables you to process paychecks. If you process payroll in-house, using payroll software is more efficient than processing the entire payroll by hand. The software vendor generally has packages based on the size of your business. To save on time and money, you might outsource your payroll duties to a payroll service company. The provider processes paychecks and often handles your company’s payroll tax and benefits obligations. All you have to do is double-check the provider’s work.

Timekeeping System

To track your employees’ work hours, you may have workers fill out weekly time sheets or install a time clock. The latter is more efficient than the former because it’s not as easy for employees to fabricate time clock hours. Depending on what kind of time clock you have, you either calculate the punches shown on the time card, or the system performs the calculations for you.

Payroll Taxes

While doing payroll, you must withhold federal payroll taxes, including Social Security and Medicare, from your employees’ paychecks and pay your own share to the proper government agencies. You also withdraw federal income taxes, state income taxes -- where applicable -- and unemployment insurance contributions. For federal income tax withholding purposes, give your new employees a W-4 form to complete and return to you in time for their first paychecks. To stay on top of your federal tax obligations, consult Internal Revenue Service Circular E, "The Employer’s Tax Guide." To determine your state and local liabilities, contact your state revenue agency or local tax assessor.

Employee Benefits

If you provide your employees with company benefits, such as health insurance, flexible spending accounts and retirement plans, the employee's voluntary contributions to such plans are also handled by payroll. Your payroll or human resources staff may handle this area of your business, or you can hire a third party administrator. If you offer paid time off, such as bereavement, vacation, sick days and personal days, your payroll administrator can keep track of what's being used.

Direct Deposit

The more paychecks you generate, you more checks you must track. Paychecks are susceptible to theft or misplacement. If this happens, issue a stop payment on the stolen or lost check and reissue another paycheck to the employee. You can avoid this possibility by establishing direct deposit with your bank and using payroll software that enables this option. Explain the advantages of direct deposit to your employees and encourage them to accept it.


Payroll accounting is how you monitor the company’s payroll expenses. Through payroll accounting, you allocate wages, salaries, paycheck deductions and other expenses to the correct financial accounts. You also perform periodic reconciliation to ensure accurate paychecks, tax reporting and accounting.

Record Keeping

The federal and state governments have specific record-keeping laws for payroll. Although payroll software stores your payroll data, you can increase reliability by printing payroll reports at the end of each pay period and filing the hard copies in a secure area. The reports break down each employee’s gross-to-net wages for the pay period.