Small Business Guides

How to prevent common
small business payroll mistakes

6 min read

A smooth-running payroll system is vital to the success of any small business. Staff payment problems can lead to low morale, poor productivity and perhaps even a government audit. Find out how to avoid common mistakes when it comes to paying your employees.

Payroll needs planning

Payroll responsibilities can seem daunting when you first start a small business. But with a little care and planning you can avoid the common mistakes others make. Planning will mean that staff are paid regularly and on time – always a happy outcome. It will also ensure that your payroll records are up-to-date and meet legal standards.

Tick all the legal boxes

Payroll is covered by tax law, which is complex – wherever in the world you do business. The penalties for errors can be high. Even the cost of an audit can bankrupt a small business. Some insurance companies sell audit protection to cover your accounting costs if it should happen to you.

You can stay on the right side of the law through accurate payroll accounting. Some accounting software for small business has payroll built into it, which makes it so much easier to meet the accuracy level needed.

Small business payroll: Eight points to consider

  1. Statutory maternity or paternity payments – make sure you track leave start and end dates.
  2. Insurance premiums – ensure the correct employer premiums are taken out.
  3. Understand any tax exemptions – these may apply to certain pay components.
  4. Benefit plans – ensure that your employees are offered the benefits for which they are eligible, when they are eligible.
  5. Statutory holidays and holiday accrual – ensure that you factor in holidays and calculate what's owed at the end of employment for holidays accrued.
  6. New hires and leavers – make sure they are included in the system, with the correct start and end dates.
  7. Employee expenses – some governments need these to be taken into account as taxable benefits.
  8. Meet important deadlines – tax payments and reporting to the appropriate government authority is important to get right.

Luckily the days of managing the payroll ledger by hand with pen and paper are long gone. Good payroll software will help you manage all of the above points and more. Accounting software with built-in payroll automates most of this, taking care of the tedious detail. Your time will be freed up, so that you can concentrate on the aspects of the business that you love.

Who really works for you?

Not everyone who works on your premises is considered an employee under some laws. If you have contractors or freelance workers you’ll need to check the rules carefully.

For example, you may have a contractor in your office with their own desk. But if you’re their only client, the government might conclude that they are an employee.

Most countries have legislation for this situation. For example 'Independent Contractor Tests' in the US, or an IR35 in the UK. As long as you read the rules thoroughly, you can avoid being caught off guard.

Ask contractors for written confirmation that they have other clients, are self-employed, and/or have their own tax reference number. This will help you avoid being stung for their tax bill, should the government decide that they are on your payroll after all.

Choose your payroll software carefully

Horror stories about payroll issues are common, from teachers in New Zealand to paramedics in Canada. These problems are often due to software that hasn’t been tested or built well, or simply doesn’t suit a particular organization.

So be careful before you change to any new payroll system. Read feedback from existing business users and test the software thoroughly before you switch to it. It’s always a good idea to have a fall-back plan ready in case things go wrong on pay day.

If possible, use tried and tested payroll software that's already being used by other companies. Don't let your company be a guinea pig for untested software.

Involve your staff in payroll decisions

As much as your employees may love working for you, it's unlikely they'd do so if they weren't being paid! Regular, timely payment is vitally important to your staff.

Small businesses may be flexible enough to accommodate their employees' payroll requests. For example, some companies choose to pay on a bi-weekly rather than a monthly basis. This often gives staff greater control over their own bill payments and expenses.

Even changing the monthly payment date could be helpful. If most household bills fall due on the 28th of the month, for example, choosing a payroll date of the 26th rather than the 30th could make all the difference to your employees.

Involving your staff in these decisions will make them feel more valued. And having staff that feel valued is proven to enhance productivity and reduce staff turnover.

Involving your staff in payroll decisions will make them feel more valued.

Understand payroll tax codes

Tax codes can change for a wide variety of reasons, including salary, benefits, bonuses, student loans, past employment and seniority. Get them wrong and you'll have some costly recalculations to carry out, not to mention embarrassing explanations to the tax authority.

So keep track of your employees' situations and update all changes promptly. Ensure that they’re in the right tax bracket. If in doubt, talk to a government tax adviser about the best way to do this, as the rules will vary from one jurisdiction to another.

Handle errors with common sense and compassion

Mistakes happen. If you discover an overpayment or underpayment, discuss it with the staff member concerned before you take action. If you take an overpayment all back in one go, it could bankrupt your employee.

Even if it doesn't, it's unlikely to improve their morale. If you take back smaller amounts stretched out over several months, it’s likely to work out better for them and your business.

If you discover an overpayment or underpayment, discuss it with the employee concerned before taking action.

Be aware of local payroll law

If you employ people in another country, you usually have to comply with the payroll law in that country. This can cause headaches if it’s not done well. It’s always an option to outsource payroll and use the services of a local payroll company to help you stay compliant with local legislation.

But making the decision whether or not to do your payroll in-house or outsource it shouldn’t be taken lightly. If you do choose to do your payroll in-house, consider using accounting software that has payroll localization features built in. This is guaranteed to save you time and money.

Talk to your tax office

Although independent tax advisers do exist in some countries, it's usually better to get information straight from the horse's mouth. So if you have questions about payroll issues, ask your government's tax office for advice.

Many governments now have online guides especially for small businesses, so your government's website should be your first point of contact when looking for payroll information.

Have backup systems in place for added security

Don't rely on a single bank account, computer or employee to handle your payroll. The risks of failure are too high. Have more than one business bank account, in case you can’t get into your main account at payroll time for some reason. This is increasingly common due to some ancient banking IT systems and ever-more-ingenious hackers.

Don't rely on a single bank account, computer or employee to handle your payroll.

Using online accounting and payroll software to store financial data, is a surefire way to reduce any potential payroll risks. With cloud-based software, your information lives online and not on your hard drive. This means it’s guarded to the highest level and no one will be able to get to it unless they have your login. In addition to this, all data is encrypted and backed up nightly in offsite servers.

Cloud accounting software also enables you to invite unlimited users to your organization. This means you don’t need to rely on one person for pay day and you’ll be able to train several of your staff to handle the payroll. You can also choose the access level of employees to ensure that no one accesses data they shouldn’t be.

Payroll is important not only from a financial point of view, but it directly affects your employees so it's key to the success of your company.

Take the time to set up a robust payroll system, and use good quality software. This will not only help you avoid common payroll problems, but it will help your business to run smoothly.

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