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For small businesses, the right payroll system can deliver big benefits

Payroll system can deliver big benefits
  • Low U.S. unemployment and rising employee wages make it a challenging time for small businesses to find the right workers.
  • Classifying workers as employees when they're independent contractors may mean shelling out out more in payroll taxes or even a violating labor laws.
  • Business owners should understand the difference between the services offered by bookkeepers and accounts.

It's a challenging time for small business owners to hire and manage employees. With U.S. unemployment near a 50-year-low, qualified workers are in short supply, while major companies and a number of states around the country are hiking their minimum wage. For small businesses, that puts a premium on getting their payroll processes right.

Especially crucial for employers: properly classifying workers as full employees or as independent contractors. Mistakes can mean running afoul of labor laws and paying more in payroll taxes to the IRS. Given the thin margins for many small businesses, it's no exaggeration to say that such errors can be fatal.

Employers can consult IRS checklists to determine whether workers are contractors or employees, but the central question comes down to how much control they have over a person's work. For example, a painter, may be employed for a short-term project, but supply their own tools and determine the project timeline.

"A rule of thumb is that if you're controlling the person's place of work, how they work, when they work -- typically, they're going to be an employee," small business consultant David Ragland, CEO of IRC Wealth Strategies, told CBSN.

For contractors, "independence" means they get more flexibility in terms of doing the job. They can also deduct expenses from their income, lowering their tax liability. 

A key decision

The bottom line, Ragland notes, is that doing payroll right can be complex and time-consuming. For business owners, a first step in ensuring that financial records are accurate is to figure out when they need a bookkeeper and when they would benefit by using an accountant (many employers will need both!).

A bookkeeper can take all of the financial records the business has stockpiled — from business receipts to reported tips — and organize the information to produce financial statements, pay bills or create invoices. Bookkeepers can also automate a part of the payroll structure by outsourcing the process to companies like ADP, Paychex, Paycom or QuickBooks. Meanwhile, an accountant can help certify all the records are correct when filing tax returns.