Paper Trails

What are the top payroll best practices?

Running a business comes with its fair share of challenges. Among them, managing payroll might just be at the top of the list of the most daunting tasks. Whether you’re a small startup or a seasoned business, the complexities of payroll management can often leave you wondering if you’re doing it right. Are you paying your employees accurately and on time? Are you complying with all those ever-changing tax laws and regulations? It’s a lot to handle, and we totally get how you feel.  Knowing some payroll best practices is a great place to start.

At Paper Trails, we’re not just about paying your employees, we’re passionate about providing the education and tips you need for your business to thrive. This article is designed to ease some of that burden, offering you a lifeline in the form of payroll best practices. After reading, you’ll have the knowledge to streamline your payroll process, ensuring efficiency, compliance, and, most importantly, happy employees.  So, let’s dive in and discover the top payroll practices that can assist your business.

What are the top payroll best practices?

Let’s cover 7 practices that all businesses should follow to ensure a smooth payroll management process.

Formulate comprehensive payroll policies

Establishing well-defined payroll policies and procedures is a must for effective payroll management. By setting clear guidelines in your employee handbook, you create a reliable reference that helps avoid misunderstandings amongst your staff. This approach makes life easier for your payroll team and boosts overall employee satisfaction.

Let’s say that you hire a new team member within your payroll or HR department. With a clear payroll guidelines, this new hire can quickly get up to speed on how your company handles everything from overtime pay to holiday bonuses, ensuring consistent payroll processing.

Schedule and automate payroll deadlines

Using payroll technology can take the guesswork out of payroll deadlines. Automating these reminders helps ensure you’re always ahead of the game, preventing last-minute errors. It also provides you peace of mind, knowing that your payroll system is running smoothly and efficiently, giving you more time to focus on what matters most—growing your business.

For example, a small business uses payroll software that automatically alerts them two weeks before quarterly payroll tax filings are due. This advance notice ensures that all necessary documents are prepared and submitted on time, avoiding late fees.

Classify employees correctly

Correct classification of employees is not just a best practice; it’s a necessity for legal compliance. Differentiating between various employment types, such as independent contractors or W-2 employees, as well as exempt vs non-exempt employees, affects everything from tax withholdings to benefits eligibility. Understanding these nuances can protect your business from costly penalties and ensure fair treatment of all your workers.

Consider a graphic design firm that hires both in-house designers and freelance contractors. By accurately classifying employees, the firm can correctly apply tax withholdings for its full-time staff while correctly processing end-of-year 1099 forms for its independent contractors.

Embrace payroll software

Transitioning to a digital payroll system can significant improve how you manage payroll. The right software simplifies complex calculations, integrates with other business systems (like time management or employee onboarding), and offers scalability as your business grows. This improves efficiency and enhances data security.

A local restaurant decides to switch from manual payroll processing to a cloud-based payroll software. This change allows them to automatically track hours worked, calculate pay with tips included, and issue payments via direct deposit.  These features significantly reduce potential errors and administrative time.

Keep accurate records

Document everything. Record-keeping is a non-negotiable aspect of payroll management. It not only helps in maintaining compliance with tax laws but also in defending your business during any disputes or audits. According to the Department of Labor, payroll records must be kept for a minimum of three years.  Using a payroll software can help with keeping payroll records organized.

For example, an online retailer maintains vital payroll records, including time cards, pay rates, and tax withholdings, in a secure digital format. When audited by the IRS, they can quickly provide all requested documentation, demonstrating compliance and avoiding penalties.

Stay up-to-date on compliance

A key payroll best practice is to know what laws impact your business.  The landscape of payroll and HR legislation is ever-changing. New laws and amendments are frequently coming into play. By staying informed about these changes, you can proactively adjust your business’ processes to remain compliant. This proactive approach minimizes risk and underscores your commitment to ethical business practices.

Let’s say a local construction company isn’t aware of Maine’s new retirement program, MERIT.  By not adjusting their policies and enrolling in the plan before the law takes effect, they may be subject to penalties and fines levied by state or federal agencies.

Embrace mobile self-service

Ensure that your payroll software comes with self-service features to allow employees to manage their payroll-related tasks independently.  Allowing this will improve operational efficiency and save HR professionals and business owners time.

Consider a small business that adopts a self-service tool.  Employees can now use their smartphones to view their pay stubs, track their hours, request time off, and update their tax withholdings. This autonomy reduces the workload on the small business owner. The change leads to a noticeable boost in employee satisfaction and a reduction in administrative inquiries.

Should my business outsource payroll or keep it in-house?

When trying to decide between outsourcing or not, keep in mind your business’ situation. Think of things like your company’s size, your company’s budget, and your current process and future goals.  If you would like to take stress off your employees, save them time on administrative tasks, ensure company compliance, and save money, outsourcing may be the best choice for your company.  Here are some tips to consider when outsourcing your payroll.


Managing payroll doesn’t have to be a hassle for your business. By adopting these payroll best practices, you can streamline your processes, ensure compliance, and keep your employees happy. Remember, the key to success in payroll management, as in all areas of business, is continuous education and improvement.

At Paper Trails, we’re here to support your journey, offering the knowledge and tools you need to navigate the complexities of payroll management. For help tackling your payroll, feel free to contact our team here.