The Reality of Payroll

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By Sherry Lutz-Herrington

One of my team members brought it to my attention recently that it seems business owners are afraid of payroll.  I thought about it and I think she’s right. We talk a lot about the difference between independent contractors and employees, but we don’t talk about payroll itself.

Maybe, as accounting professionals, we don’t realize how intimidating the payroll process can seem.

Let me unpack it a bit and see if I can reduce the anxiety surrounding having employees.  

Employee vs Independent Contractor

There is a time and place for both and it’s important to distinguish between them.  I addressed this recently in my blog Help Needed, so I’ll refer you to that article for more clarification on the differences and when you will want which.

New Hires

There are both federal and state laws governing payroll. You must comply with both, but also know which supersede in cases of overlap.  For example, federal minimum wage is currently $7.25 per hour. But the rate in the state of California is $13.00 per hour for employers with 26 or more employees, and $12.00 per hour for employers with 25 or fewer employees.  When the state rate is higher, employers must pay that rate. Occasionally there is also a local rate that applies as well. Again, if higher than the state rate, that is the rate that must be paid.

There are two classifications of employees:  

  • Exempt – they are exempt from overtime pay and minimum wage laws. Instead they are paid for the work they perform, not the hours they work.  Essentially this would mean they are paid a salary. Generally, these employees perform executive, administrative or professional duties.  There are other specifics that apply as well. Research further if you believe you should classify an employee as exempt.
  • Non-exempt – employees are paid by hour. They are entitled to overtime pay at a rate of time and a half of their regular rate.  Additionally, there are guidelines that specify when the employee is working overtime. For federal requirements, this is over 40 hours in a week.  Individual states may have more stringent laws, particularly California, so be sure you follow the state guidelines when they apply.

There are also specific forms that must be completed and used to set up employees on payroll and to notify the state that you have hired someone. Once hired, only rarely will an employee make changes to their information that will require updates in the payroll.

Time Keeping

A client told me recently that he preferred his employees to be salaried, so he didn’t have to hassle with timecards, overtime, etcetera.  Unfortunately, this may be costing him unnecessary wages. If he doesn’t have enough work to keep his employees busy 40 hours per week, he still has to pay them for the whole time.

Yes, there are laws governing breaks, overtime, and other nuances that need to be monitored for hourly (non-exempt) employees.  However, it is easier today than ever as there are a multitude of time-keeping apps. Many are user friendly and can be set up for your state. These apps make it easier to stay in compliance.

I still find employers using paper timecards, but this is risky and not advised.  As oversight is more difficult, errors are more likely and it’s easier to fudge the hours worked.  

After your staff is trained on how to use the system, and you understand how to approve the hours, then the process is fairly routine and painless.

Payroll Schedules

Payroll is set up so that employees get paid on a preset schedule.  In the state of California, employees must be paid no less than two times per month unless they are the officers of the corporation.  The state itself pays once a month, but this is not allowed for other employers (what the heck, right?).  

Generally, there are three options:

  • Semi-monthly – which is the most used schedule, means twice a month.  Usually this means the pay period cuts off at the end of the month and again on the 15th with paychecks issued within a few days.
  • Bi-weekly – which means every other week on the same day.  For example, the pay period ends every other Friday and paychecks are issued the following Tuesday.  You end up with a few months during the year when three paychecks are issued due to the length of the months.
  • Weekly – where the pay period ends at the end of the work week and checks are issued within a few days.  This is the most time intensive and hardest to keep up with but may be easier on cash flow as the amount paid each time will be lower.

Once you set up your schedule, there is generally no reason to change it and there is no more worry.

Payroll Taxes

I see more accounting mistakes in this area than in almost any other. Especially if the payroll is not handled within the accounting software.  In other words, if you hire an outside company to handle your payroll and you do your own accounting, then it is probably not being integrated into your books correctly.

Sorry, I know you didn’t want to hear that.  

When you hire employees, you become an agent of the government. You must withhold payroll taxes from your employees’ wages and pay them to the government.  This confuses most business owners and rightfully so.  

Essentially what happens is that both the employee and the employer are responsible for paying taxes on wages.  Some are split and some are assigned to one or the other party. Either way, the amount due should be set aside and paid to the government (some are federal, some are state).

When you cut a paycheck using a payroll program, these amounts are withheld. The employees receive their net pay (gross wages minus taxes withheld).  The withheld portion, along with the employers’ portion, is then paid to the government by the employer.

When the person setting up the payroll sets it up right, it is hassle free.  The key for the business owner is setting aside the money due for taxes and paying it on time. Calculating ahead roughly what will be due and working it into your budget will help tremendously.

Vacation, sick, holiday and other time off

Without going too deep here, let me just say that once you know the minimum standard set by law then you can easily stay in compliance.  A few years ago, California mandated a minimum of 24 hours per year of sick time for all employees. However, you have options on how you set it up. It can be based on hours worked so that if an employee doesn’t meet the requirements for hours, you do not have to pay out any more than what is owed.

Other time off is set by the company policy.  Here it is important to have a professionally prepared employee handbook. It should lay out the details of what the company offers to whom and when.  There are a lot of different ways to handle what you offer. What fits for one business may not fit for another. Bear in mind the financial obligation these benefits create for the company and be sure they are affordable.  Most small businesses offer the minimum required and as that is typical, most employees don’t expect a lot more.

Again, once set up, the policy will need only minor adjustments over time.  I do advise that you work with either a human resource professional or an attorney who specializes in this area.  The employer is at greater risk should an employee file a complaint. Not knowing or following the laws can be quite costly for employers as normally the law favors employees.

Although payroll can be intimidating, if it is set up correctly and you have protected the business sufficiently,
it should not be overly complicated.

Having your payroll handled by a payroll specialist who understands and integrates it properly into your accounting is paramount to your success as an employer.  Knowing and following the law is critical but with professional guidance can be implemented and carried out smoothly and easily.  

Running a business often requires that you have employees. Educate yourself and be smart in hiring and paying your employees to protect your business and increase your success.

Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (, a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at

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