The True Cost of Paying Employees: What Business Owners Need to Know

Payroll may seem straightforward—pay your employees for their time, issue a paycheck, and move on. But any business owner who has managed payroll firsthand knows that beneath the surface, it’s a complex, time-consuming, and often expensive process. The real cost of payroll goes far beyond wages, touching on compliance, taxes, reporting, and administrative overhead.

Payroll Compliance & Tax Filing

Before you even run your first payroll, you must set up federal and state tax IDs. Each state may have different tax requirements, and some states require additional agency registrations for withholding and unemployment insurance. Once payroll is running, quarterly and annual tax filings must be completed accurately and on time. Miss a deadline, and penalties can be steep.

For larger employers, payroll taxes must be deposited the day after each payroll cycle. Smaller businesses may have slightly more time, but the burden of tracking deadlines and filing requirements still looms large. And if you don’t withhold and deposit taxes properly, you’re not just facing a fine—you’re breaking the law.

Payroll Processing & Employee Time Tracking

The process of gathering, reviewing, and approving employee hours isn’t as simple as it sounds. Many states, like California and Colorado, require employers to track in-and-out times to the minute. That means collecting timesheets, verifying breaks, and auditing for potential payroll errors—tasks that can quickly consume valuable administrative time.

And let’s not forget about overtime rules, which vary by state. In California, for example, employees earn overtime pay after eight hours in a single day and may qualify for double-time pay in certain cases. Keeping track of these calculations is not only tedious but also critical for compliance.

Wage & Benefit Deductions

Beyond paying wages, payroll also requires businesses to calculate and manage deductions such as:

• 401(k) contributions (which must also be reported for tax compliance and transferred to the 401(k) plan promptly after a payroll is processed)
• Health insurance deductions
• Wage garnishments
• Pre-tax and post-tax deductions for benefits like flexible spending accounts

Employers must also track accrued benefits, such as paid time off and state-mandated sick leave, ensuring these balances are accurate on employee paystubs.

Regulatory & Compliance Reporting

Payroll isn’t just about paying employees—it’s about keeping records. Businesses must retain payroll records for up to 10 years to comply with potential audits and employee disputes.

Additional required reporting includes:

• W-2 & 1095-C Forms: Employers must issue W-2s to employees by January 31st each year, as well as 1095-C forms for companies subject to ACA reporting requirements.
• EEO-1 Reports: For businesses of a certain size, reporting demographic workforce data is mandatory.
• State & Federal Tax Returns: Employers must file not just their business taxes but also reports related to payroll taxes and benefits plans like 401(k)s.

Failing to manage these reports correctly can result in costly audits and potential legal challenges.

Payroll Made Simple

Payroll is one of the most critical aspects of running a business, but it doesn’t have to be a drain on resources. By leveraging a Strategic Workforce Partner, such as ClearPath, companies can shift their focus from payroll burdens to business expansion, all while protecting their profit margins.

Is payroll costing your business more than it should? Let’s talk.