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Payroll: The Most Sensitive Function

This week, we’ll turn our attention to the most sensitive function that exists in any company…


Payroll is not something you want to mess up - and it can be really draining if not set up correctly.

Note that a lot of what we are covering today may differ depending on if you are a US-based company, or based outside of the US. For most of the examples below, we will assume your company resides in the US.

Payroll: The Most Sensitive Function - what does payroll look like?

Your payroll function contains a lot of tasks…such as:

  • Onboarding new employees

  • Finalizing paycheck details

  • Coordinating state tax issues

  • Health Insurance registrations

Sometimes this department is managed by the HR department…though it’s common for Accounting to have their hand in things either way.

The key thing about a payroll function is this:

You are responsible for ensuring employees are paid on time, and correctly.

Even the slightest disconnect in this process can mean a catastrophe for you and/or your employees.

We’ve seen all sorts of mistakes…from missed paychecks, to late health benefit registrations, to incorrect amounts entered on a pay stub.

In all cases, tensions got high…as you’re dealing with someone’s livelihood.

Thankfully, there are a number of tools and processes that you can adopt to minimize the likelihood of any sort of catastrophe.

Let’s turn our attention to our suggestion…but first, it’s important to clarify what a PEO is, and a non-PEO.

Payroll: The Most Sensitive Function - PEO vs Non-PEO

Nowadays, no one processes payroll by hand.

”By hand”, we mean processing a manual wire to an employee.

The reason it’s rare to process a direct wire is because you are required to remit payroll taxes on behalf of both your company, and the employee (yes, you are both taxed).

Instead of processing a manual payment, companies often times adopt a payroll service….but there are 2 types of payroll services you can adopt.

Professional Employer Organization (PEO)

Payroll: The Most Sensitive Function - Professional Employer Organization

A PEO operates in a strange way…

All employees become “employed” by the payroll company, allowing your company to take advantage of certain perks such as competitive health benefit rates.

Other benefits of using a PEO lie in their ability to handle state tax filings & notices. Each time you hire someone in a state, you will have to follow specific rules for that state such as registering to do business, updating unemployment insurance amounts, and other items that can be really cumbersome to manage.

While PEO’s simplify a lot of the payroll process, they can also be expensive.

For that reason, companies sometimes opt for a non-PEO.

Non-Professional Employer Organizations

Payroll: The Most Sensitive Function - Non-Professional Employer Organization

There are many payroll platforms that will still make it a breeze to withhold your payroll taxes accordingly, and manage your employee pay stubs.

The difference with non-PEOs is that the payroll platform will be more limited in what exactly they can do on your behalf.

For example, each time you hire an employee in a new state, it will be up to you to go ahead and register to do business in that state.

If that employee leaves your organization, you will need to then contact the state to inform them, or you’ll keep getting notices from them.

Our advice is to use a non-PEO if you are a small company of fewer than 10 employees, and consider switching to a PEO once your level of headcount exceeds this amount to save time & effort.

Professional Employer Organization - How to setup your Payroll function efficiently

Like all functions in your Finance & Accounting department, you should consider the following aspects:

  • Staying efficient without a heavy drain on your resources

  • Maintaining a high level of accuracy (especially here)

One of the best ways to accomplish both points mentioned above is to adopt technology, as well as drafting standard operating procedures.

Here’s our preferred approach

Create a group Email, payroll@[your-domain].com

Group emails come up a lot in our emails, and are used to “subscribe” multiple members in your organization to all emails that go to that group email, without costing you for an extra email license.

If you use Gmail via what’s called a “group”, this similar approach can be used for most other email clients.

Start by giving this email out to all of your employees if they have any questions, and starting CC’ing it on offer letters whenever they get signed by new employees so that the accounting team knows to begin the onboarding.

Invite Employees to Payroll Platform

Most payroll platforms will do the job of collecting all the information that they need from the employee, such as:

  1. Their address and personal details

  2. Their proof of identification (often times verified via what’s called an I9 form)

  3. Their tax elections

Be prepared to collect a few other pieces of information that will be helpful to save in your file repository, such as a copy of their ID, or their offer letter.

Prepare a Payroll Backup File in Excel

Is there a raise that should be applied in the next paystub?

Don’t make the mistake of thinking you’ll remember next time you run payroll.

Write. It. Down.

Anytime you have something to do in your accounting function, it’s a good idea to write it down so that you don’t forget.

We like to keep an excel file that previews the details of every paycheck, allowing us to make quick updates when any changes are communicated.

Collect Approval Before Processing

Before you process a paycheck, check with the relevant approvers to ensure all details are entered correctly, and there are no changes that haven’t been communicated

Set up Autopay

It’s a good idea to have your payroll run on autopay as an extra precaution in case something gets missed…but don’t mistake this as a “set it and forget it” approach.

You should be checking every detail of every paystub each pay cycle before it gets processed to ensure the utmost accuracy.

Payroll can be a real delicate function…with a huge requirement for accuracy.

As with all functions in your Finance & Accounting department, the more thought out and structured your processes, the more seamless it will all run…allowing you to do what you do best - run your business.

Payroll: The Most Sensitive Function is the last article in the how to structure your Finance & Accounting function correctly series.

In the next article, we’ll be covering the details behind your business's taxes.

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