As a Small Business, Do I Really Need a Payroll Company?

Staying on top of payroll compliance is crucial for every small business. It keeps you in line with laws, avoids costly mistakes, and ensures employees feel valued. We often get asked why a business should outsource their payroll?  Of course, it all depends on your situation, but let us run through just 11 steps you will have to do before you even cut a check!

Here’s our detailed checklist to help you tackle payroll compliance should you choose to ‘go it alone’:

1. Employee Classification

Misclassifying employees is one of the most common compliance mistakes. You need to properly identify whether a worker is a full-time employee, part-time employee, or independent contractor. The classification affects how you handle taxes, benefits, and legal responsibilities.

• What to do:
  • Review IRS guidelines (in the U.S., refer to the IRS test for employment status).
  • Double-check state-specific or local definitions of contractors and employees.
  • Regularly audit roles that seem ambiguous to confirm their proper classification.
• Pro Tip: Consider consulting a labor attorney or accountant if you’re unsure about classifications.

2. Obtain Necessary Tax IDs

Every business must be registered with the necessary tax authorities to handle payroll. This requires obtaining an Employer Identification Number (EIN) and, depending on your state, state withholding or unemployment account numbers.

• What to do:
  • Apply for an EIN through the IRS (quick and straightforward online process).
  • Check your state’s tax agency website for additional IDs needed to remit state taxes.

3. Understand Payroll Tax Obligations

From federal taxes to state and sometimes even local taxes, you’re required to calculate, withhold, and remit employee taxes accurately. Here’s what to manage:

• Federal taxes like FICA (Social Security and Medicare).
• State income taxes, where applicable.
• Unemployment tax rates (FUTA and state unemployment taxes).
• Local taxes (specific in some cities/counties).
• What to do:
  • Mark important deadlines for payroll tax payments and filings on a calendar.
  • Use the IRS EFTPS system for federal tax deposits.
  • Double-check state- and industry-specific tax requirements as they can vary widely.
• Tip: Many payroll service providers like APlus,  automate the tax calculation and filing for you, significantly reducing errors.

4. Set Up Payroll Schedules

You must determine how often employees will be paid (e.g., weekly, biweekly). State laws often dictate minimum requirements for pay frequency.

• What to do:
  • Review your state labor laws to ensure adherence to payday regulations.
  • Clearly outline pay schedules in your employee handbook to reduce confusion.

5. Track Work Hours Accurately

If you have hourly or non-exempt employees, you must legally track their hours worked to ensure compliance with wage and hour laws.

• What to do:
  • Invest in a reliable time-tracking system, such as TimeCamp or TSheets, to reduce manual errors.
  • Ensure employees understand how to log their work hours and overtime.
• Key Tip: Incorrect or incomplete tracking can lead to wage theft claims. Stay on top of this!

6. Stay Compliant with Minimum Wage Laws

Ensure that your pay rates meet or exceed federal, state, and local minimum wage laws. These can vary widely depending on where your business operates.

• What to do:
  • Review wage requirements annually, as they often change.
  • Factor in industry-specific rules, especially in sectors like hospitality or retail.

7. Provide Wage Notices & Keep Pay Stub Records

Some states require you to provide written wage notices to employees, detailing their pay rate, pay frequency, and other key details at the time of hire. Additionally, maintaining accurate pay stubs is often mandatory.

• What to do:
  • Include all legally required details (e.g., deductions, net pay) on pay stubs.
  • Store at least three years of payroll records in a secure, accessible system.
• Tip: Digital record-keeping simplifies this process and helps you stay organized.

8. Handle Overtime Pay Correctly

The Fair Labor Standards Act (FLSA) requires non-exempt employees to be paid overtime (1.5 times their regular pay) for any hours worked over 40 in a week. State laws can introduce varying rules.

• What to do:
  • Confirm employee eligibility for overtime pay based on classification.
  • Use payroll software to automatically calculate overtime during payroll runs.

9. Submit Year-End Filings on Time

At the end of the year, businesses must provide tax documents, such as W-2s for employees and 1099s for independent contractors.

• What to do:
  • Mark clear deadlines (W-2s and 1099s are generally due by January 31).
  • Have a system to double-check accuracy before filing. Errors here can be costly!

10. Build a Record-Keeping System

Payroll compliance requires you to keep detailed records of payroll operations, tax filings, and employee documentation. States and federal entities have varying requirements for how long you should retain these records (e.g., most suggest at least three years).

• What to include:
  • Copies of W-4 and I-9 forms.
  • Payroll records showing gross pay, deductions, and net pay.
  • Notes on time-off and leave policies.
• Tool to try: Use payroll software with built-in record retention features.

11. Stay Updated on Rules & Regulations

Employment laws are updated regularly. Staying informed ensures you don’t unknowingly fall out of compliance.

• What to do:
  • Follow updates from the U.S. Department of Labor, IRS, or your local government.
  • Subscribe to newsletters or alerts from Small Business Administration (SBA).
  • Schedule regular meetings with an HR or payroll professional to review processes.

Bonus Tip: If this all sounds complex, don’t hesitate to call us! Many  businesses (big and small) use payroll processing services like APlus to simplify their process. Schedule a demo today to see how we can help you!

This blog does not constitute formal HR or legal advice and does not address state or local laws. Our HR Resource Center by Mineral offers further guidelines for these and many other topics. For a small additional fee you can also speak to a live HR Specialist. Contact your friendly APlus Payroll CSS for further information (including login details) or login here. Want to know how we can help your Payroll or Time & Labor process? Please contact us here. Consultation is friendly and free!