Why You Probably Shouldn’t Handle Your Own Payroll
On the face of it, it seems like a great idea.
If you’re an entrepreneur or small-business owner, your young and/or comparatively tiny company may not be able to afford hiring a payroll specialist. Outsourcing your payroll operations may also be off the table, for the same reason.
So, what’s a business owner to do? Well, you could just handle the payroll yourself. You don’t have that many employees, right? And you’re only going to do so until you can afford to pay someone else to do it. What could go wrong?
Lots, actually. If the sheer obscurity of the American tax code isn’t enough to scare you away — and, honestly, it should be — then maybe a brief rundown of all the ways you could screw up will make you stop and reconsider.
Hiring Out-of-State Talent? Good Luck!
You want to hire the best of the best, right? Why settle for a mediocre employee from the same state when you can hire a superstar who is willing to commute from across state lines?
As it turns out, trying to calculate payroll for employees who live in different states from where the business is located can be a huge hassle. Individual cities and states all have their own tax-related rules and regulations. Your office is in Connecticut, but you have an employee commuting in from New York? Their tax situation may give you migraines if you try to do it all on your own.
“Especially when you’re doing multi-state payroll, there are a lot of factors that come into the payroll calculation,” explains Melanie Kramer, vice president of specialty support at TempWorks. “For example, you have things like reciprocity agreements between states and localities. If people are doing their payroll without a payroll system that is aware of all those nuances, there could be some big issues, in terms of the tax calculations.”
(You may also run into similar confusions when paying remote workers, though these arrangements are usually not as knotty or strange as they seem on the surface. )
Are you Sure You Know How Overtime Works?
Not all states handle overtime laws the same way. Compare, for example, California’s relatively worker-centric overtime laws with New Jersey’s fairly bare-bones time-and-a-half policy.
Sure, you could try to keep track of overtime all on your own, and that might work in some states, but if your business operates in a place like California, overtime becomes significantly more difficult to track manually.
“In California, companies are required to pay overtime after eight hours [in one day] and double time after 12 hours [in one day],” Kramer says. “It’s very easy to miss that when calculating payroll outside of a system.”
Missing overtime wages can lead to serious legal ramifications for your company.
What About Pre- and Post-Tax Adjustments?
“Certain types of adjustments are exempt only in certain tax jurisdictions,” Kramer says. “If you’re not using a payroll software that is aware of those nuances, you could potentially withhold an adjustment pretax when it shouldn’t be, or vice versa.”
Suffice it to say that the whole issue of pre-tax and post-tax adjustments can be super confusing. Best to just avoid it entirely by not attempting to handle your own taxes.
So Then — How Do You Handle Payroll When You Can’t Afford a Payroll Specialist?
Come one, man, you say to your computer screen. I know I need to hire a payroll specialist or outsource my payroll someday, but I just can’t afford it right now. What am I supposed to do?
You’re in luck, friend. Just because handling your payroll by yourself is a bad idea, that doesn’t mean you have to necessarily jump straight to hiring someone.
No, what you really need is the right payroll software, says Kramer.
Not just any payroll software, of course: you need a payroll software that’s specifically designed to handle all the complexities of the American tax code. You should be looking for something that will carry out the calculations for you, with as little manual intervention necessary as possible.
“You need a payroll system that is aware of all the [tax code] nuances and is able to accommodate those nuances,” Kramer says. “For example, you need to be sure that the payroll system has all the reciprocity agreements coded into it, so that there is no guesswork [when paying out-of-state employees].”
Not only will getting the right payroll software make your life easier — but it’ll also make your employees happier, too.
“You want to be sure you’re calculating taxes correctly so that you aren’t overwithholding or underwithholding for your employees,” Kramer says.
If you overwithhold, employees end up with less money in their pockets than they thought they would get. If you underwithhold, your employees could face hefty tax payments and penalties come April.
Help your employees avoid this mess — and give yourself peace of mind — by finding the right payroll software.
That is, until you can hire someone to do payroll for you.