Small businesses can spend as much as 21 days per year calculating, filing, and paying payroll taxes. And that’s shocking, considering the technology available today that can make the process simpler and more approachable.
Spending almost five hours per day on payroll just doesn’t make sense from a business perspective. That time would be much better spent growing the business, getting new clients, and figuring out how to gain an advantage over the competition.
The good news is that with the help of payroll software, you can streamline the majority of challenges that come with managing payroll, saving a ton of time and money, and avoiding a lot of frustration that comes with the process.
To help you figure out how to utilize modern solutions that can help simplify payroll, let’s go over a few of the key steps you should go through when calculating payroll tax.
Begin by Calculating the Gross Pay
When calculating tax for payroll purposes, you must begin by calculating the total gross amount you will be using. While this may seem straightforward, it also includes all overtime your employees should be paid for, so go through your accounts carefully and analyze what amount they should get in total.
Modern payroll solutions help you automatically keep track of all your employee hours, including overtime, which will make the entire process much more manageable. In fact, you will usually have all the information conveniently presented in the dashboard, where you can begin the next steps of calculating the taxes you will need to pay for the amounts of different employees.
Calculate the Tax Withholdings
Each employee can have different tax withholdings, which is why you can’t apply a universal formula in all situations. Instead, you need to look at each person’s allowances in the W-4 form and calculate how much you will need to withhold in their case.
These withholdings should be considered not just for the federal taxes but also for the state and local taxes, as well as FICA.
The good news is that leading payroll management solutions make the process easy, allowing you to quickly move through the complicated calculations and know that they are accurate and in compliance with state and federal laws.
Take Into Account Additional Deductions
A crucial part of accurately calculating payroll taxes is being aware of the additional deductions your employees might have chosen to use. These can include voluntary insurance premiums, various savings account contributions, or 401(k) plans.
You need to have a process for tracking the information on each person’s voluntary deductions, which can be a challenge. But with payroll software, you can store the information in one place and have it be applied automatically.
After you complete the tax deductions and know how much you need to subtract from the gross amount, you also need to evaluate which employees have paid for any company expense out of pocket. They will be expecting reimbursement for the money they have spent, so you’ll need to figure out the best way to make that happen.
The two popular approaches are to either include it in their payroll or make it a separate payment after all of the other deductions have been made.
Finalize the Payroll
The final step of the process is finalizing the payroll so that each employee can be paid the net amount they are owed. If you followed the process outlined above up to this point, you should be left with the correct amount and can start finalizing the payment to each employee.
However, as you have probably noticed, the amount of work it would take to do everything on this list manually explains why many small businesses end up spending so much time on payroll. The good news is that if you implement an effective system for managing the process, you don’t have to go through each step manually and can utilize technology to simplify and automate payroll taxes.
Payroll taxes can be one of the most complex parts of running a small business. But while going through the process manually can take a lot of time, there are solutions you can use to make it more manageable and significantly reduce the time it takes to calculate the difference between gross and net pay.
Even though the steps listed above are a fundamental process that will always remain mostly consistent, the efficiency with which it’s completed will largely depend on whether you do it manually or use one of the leading payroll solutions available today.