Payroll for Entrepreneurs: DIY or Outsource? (2024 Update)
By VICKY BROWN
So, you’ve found the perfect person to join your team. Well, that’s awesome! But now comes the tricky part – you’ve got to pay them. So let’s take a look at your options for setting up payroll:
Number 1 – you can go the DIY route; either with or without software. Or number 2 – you can pass it off to a pro, meaning an accountant or payroll service.
Now, let me save you some headaches right off the bat. If you’re thinking about doing payroll in-house without specialized software – just don’t. Trust me, it’s a minefield of complications. Take California, for example. Our pay stub requirements alone are enough to make your head spin. You need company ID numbers, itemized pay rates, specific date ranges, and don’t even get me started on sick time accrual notices. The bottom line: you need software support, at the very least.
Now before you cut that first check, you’ve got some homework to take care of: You’ll need to get your EIN: This is your Employer Identification Number from the IRS. You’ll need it for taxes and other official documents.
And then there’s the state ID: In addition to the Feds, you’ll have to register with your state too. Again, in California, you’d go through the Employment Development Department or EDD.
An another big ticket item – workers compensation insurance. Listen, this isn’t optional, folks. You need insurance to cover workplace injuries or illnesses. Some states even have programs to help new employers get started. But either way – you have to have it; no wiggle room.
Now, every time you run payroll, you’re dealing with two main categories – the employee’s gross wages (that’s their salary before any taxes or withholding amounts are taken) and the employer taxes (this includes social security, Medicare, unemployment insurance, and any other state taxes).
On the employee side, you’ll be handling federal and state income tax, state disability (if it applies), and the employee’s portion of Social Security and Medicare.
Now, generally, you’ll be reporting and paying these taxes quarterly. If you go the DIY route with software, make sure you understand if they’re handling the filings for you or if that’s still on your plate. Remember, even if someone else is doing the paperwork, you’re still on the hook if something goes wrong.
Now on to the nitty gritty of actually running payroll. First decision: how often? You’ve got weekly, bi-weekly (every two weeks), or semi-monthly (twice a month) options. Weekly tends to be a rare option, that is outside of certain industries, like restaurants. What’s most common? Bi-weekly or semi-monthly.
But here’s a crucial point – bi-weekly and semi-monthly are not the same thing. Bi-weekly means 26 payrolls a year, while semi-monthly is 24. This affects not just how often you pay, but how much you pay each time. Semi-monthly can get tricky because months aren’t all the same length. You might need to calculate a daily rate to keep things fair. It’s doable, but it’s definitely more complex.
Don’t forget about pay periods and payroll in arrears. What the heck is that? Well, the pay period is the working time you’re paying for. Since it takes a bit of time to process payroll (gathering timecards, putting the data in the system, running the calculations, cutting the checks and/or processing the direct deposits), generally there will be a few days break between the end of the pay period and the actual pay date. This is called payroll in arrears, and it is the most common processing method.
“… another big ticket item – workers compensation insurance. Listen, this isn’t optional, folks. You need insurance to cover workplace injuries or illnesses.”
So, for a bi-weekly payroll – usually the pay period cutoff is the week before the pay date. For example, for the bi-weekly pay period of the 1st through the 14th, the actual pay date would be the 20th And the 16th through the 20th would be used for gathering and processing the payroll information. The week of the 15th would then be week 1 of the next pay period and so on.
With a semi monthly payroll, you might have something like a pay period cutoff date of the 15th, with a pay date of the 20th, and for the second pay period in the month, a cutoff on the 27th for a pay date of the 31st. And then the 30th and 31st would belong to the next pay period.
Another challenge with a semi-monthly pay period is doing the calculations when you have employees who are eligible for overtime. If the end of the pay period (for instance the 15th) falls in the middle of a week, you have to calculate any weekly overtime and pay it retroactively on the next payroll. It’s all doable – but trust me, payroll is complicated enough without these additional – um – complications.
Are you thinking about offering direct deposit? It’s convenient, but remember:, you can’t force employees to use it; and you’ll generally be required to fund payroll at least two days in advance. So be sure to consider any cash flow implications before committing to this option.
Whether you’re an entrepreneur jumping into a leadership role, a seasoned business pro with new HR responsibilities, or just starting your HR career – we’ve got the right path to guide you through your HR hurdles.
Check out the Leaders Journey Experience. This online education platform holds the LJE Masterclass, HR SimpleStart Academy and HR FuturePro Academy.
Not sure where to start – take the quiz!
Alright, just when you think you’ve got it figured out, payroll can throw you some curveballs:
For instance, unemployment rates can change yearly; and you might need to handle garnishments, benefit premiums, or retirement plan contributions. And remember, each of these things has its own tax and withholding rules. So that all bring us to the main question – DIY or Outsource?
So, what’s right for you? Are you ready to take on the world of payroll software, or does handing the whole thing it off to a pro sound more like your speed? Whichever you chose, remember staying informed about the basics of payroll is crucial for any entrepreneur. Because it’s your business, and ultimately, you’re the one who is responsible for getting it right.