You don’t need to know everything there is to know about running a business when founding a startup. Many of the most successful entrepreneurs in history had much to learn when first starting their companies.

However, because most startups fail, you can improve your odds of success by familiarizing yourself with certain essential ideas and processes as early as possible.

For example, payroll processing is a critical element of any business. It can also be somewhat more complicated than many startup founders realize.

Don’t start a company without understanding the basics of payroll processing. While an entire course could likely be taught on this subject, the following general overview will introduce you to certain essential points.

Payroll Processing: Elements All Startup Founders Must Understand

Withholding

Most entrepreneurs understand that payroll processing involves making sure employees are compensated properly and on time. However, that’s not as simple as it may sound.

The amount of money an employee earns isn’t necessarily the amount they may be paid. To some degree, you need to withhold certain amounts of money from employee paychecks. 

There are many reasons you may withhold some of an employee’s pay. Naturally, all businesses are impacted by tax laws. Unless you’re only working with contractors who are responsible for setting aside money for taxes on their own, generally, you’ll be responsible for ensuring money is withheld for tax purposes. That’s one of many reasons it helps to use a payroll solution that has built-in tax tables and automatically updates when changes are made to the applicable tax laws.

You might also withhold money for employee benefits. At some point, you may even need to set aside a portion of a worker’s paycheck if their wages are being garnished

The main point to understand is that the amount of money you pay your employees isn’t technically the same amount they take home. Payroll processing involves making sure you’re withholding the proper sums.

Time factors

Just as you probably understand that payroll processing involves making sure employees receive pay they’ve earned, you also likely appreciate that payroll processing may involve calculating an employee’s pay based on how many hours they worked in a given pay period.

This is another topic that’s more nuanced than some startup founders account for when starting their businesses. Often, the amount of money an employee is paid for an hour of work will depend on various factors.

Overtime provides an obvious example. As a business owner, if you have hourly employees, you must compensate them appropriately when they work more hours than they’re typically contracted to.

However, other factors can also impact hourly pay. For instance, for some businesses, it makes sense to pay different hourly wages for different shifts. You need to account for such factors when setting up a payroll system. Luckily, the right payroll processing software can help you easily do so.

Payroll schedules

Not all businesses adhere to the same payroll schedule. A payroll schedule that’s ideal for one business may not necessarily be right for another.

You can’t choose a payroll schedule arbitrarily. You need to consider many factors when making this decision. Additionally, each state has certain legal requirements regarding payroll scheduling.

Along with ensuring legal compliance, your goal when choosing a payroll schedule is to strike a balance between benefiting the business and benefiting the employee. Too many business owners don’t thoroughly account for employee attitudes and needs when setting up payroll schedules. High turnover is a common (and costly) result.

You need to work closely with anyone else involved in making this decision when considering your options. Again, a schedule that suits one business may not suit yours.

For example, perhaps your business is small, and most of your “employees” are actually contractors or freelancers. In this case, you may be able to justify a monthly payroll schedule. That would not be so if you primarily employed hourly workers.

Accuracy

It’s a basic point, but one that’s so critical it earns a spot on this list. Quite simply, you need to ensure all elements of your payroll processing system are accurate. Even failing to properly compensate a single employee once can lead to unnecessary headaches. This is another aspect of payroll processing that can be simplified by choosing a reputable payroll software or payroll services provider.

Delivery methods

There are many ways to pay employees. Some employees receive physical checks. Some have their paychecks deposited directly to their bank accounts. These days, many contractors and freelancers also receive payment via third-party services, such as PayPal.

As your business grows, you may find yourself paying employees in a variety of ways. For instance, your hourly employees may receive checks, while freelancers receive PayPal payments. You might also boost employee satisfaction and engagement by allowing employees to choose how they’re paid. As such, setting up a payroll processing system so that you can deliver paychecks in a variety of methods is a wise idea.

Reporting new hires

Don’t forget this important payroll processing task! At the end of every pay period, you need to report new hires to the IRS. Make sure this task is part of your systemic approach to payroll processing.

On a similar note, just as you need to set up an appropriate payroll processing schedule, you should also determine when your business will pay taxes withheld from employee paychecks. You could find yourself in financial and legal trouble later if you fail to do so.

Record keeping

You already know that keeping payroll records is important. What you might not know is that payroll record retention laws vary from one state to another. Federal laws also apply. To avoid legal problems in the future, familiarize yourself with the laws that apply to your business when you first establish your payroll processing system.

None of this is meant to overwhelm you! Remember, plenty of thriving startups have been founded by entrepreneurs who didn’t understand some basic business concepts at first. You’re simply more likely to succeed if you make an effort to fill in your knowledge gaps sooner rather than later. If a topic here was new to you, make a point of researching it in greater detail.