Small Business Guides

10 steps to perfect small business payroll this year

8 min read

This is a good time of year to review various parts of your business. Payroll is sometimes neglected in reviews, yet it's an important topic. So here's how to make payroll work perfectly for you this year.

Time to plan ahead

If you've read our guide about new year's accounting resolutions, you'll know that this can be a good time of year to make changes. The first months of the new year give you an opportunity to review your business.

This might mean seeing the 'big picture' and making new plans, or upgrading your accounting software. You might reconcile your accounts, or maybe have a good long talk with your accountant.

Whatever you do, don't forget about payroll. Payroll is at the heart of every business. It's all about your most important asset – your employees. If you get it right, your business is more likely to flourish and grow. But any business with a poorly-run payroll system will struggle to survive.

So here are ten steps to perfect small business payroll. Use them to help get your payroll operations running smoothly this year.

1. Set up your payroll software properly

This might seem obvious, but it's not enough just to have a payroll system. It has to be set up correctly for your business. No two businesses are exactly alike, so small business payroll should be tailored accordingly.

Don't rush this process. Put aside plenty of time to set up your payroll accounting software to make sure it suits your business. It will save you a lot of trouble in the long run. It will also ensure that you aren't penalized by state authorities or the tax office.

If you're not completely sure what to do, get help. This might be a good time to hire an accountant or financial advisor. Their fees should be offset by the amount of time they save you.

2. Pay your employees on time

The most common wage payment schedules are weekly, bi-weekly and monthly. Some regions might have their own laws about minimum pay periods, so check local legislation. If you don't pay on time you might have to pay a penalty.

But this is more than just a payroll issue – it's a management one. Your employees rely on regular wages. If their payment is late, or the wrong amount, morale will suffer. That will affect your business, so it's important to pay your staff on time, every time.

3. Set up direct payments

Setting up direct salary payments for your employees is a good way to ensure that they are paid on time – and the right amount.

Most banks will allow you to set up regular, direct payments to your staff. With a data feed from the bank into your accounting software, you can keep your payroll status updated in real-time.

There have been news stories in recent years about automated payroll systems going wrong. So do your research. Choose small business payroll software with good reviews and customer feedback. And if possible, try before you buy.

4. Classify your employees properly

Do you know the difference between an employee and a consultant or contractor? It's not always clear cut. For example, a consultant who's been working for you for a long time may be treated as an employee by the tax office.

Getting this wrong can be bad for your business and also bad for your staff. They may end up paying too much tax, or missing out on benefits. You may even be penalized by the tax office.

Our guide to hiring an independent contractor will help you work out who is an employee and who isn't. But always check local legislation to be sure that your staff are classified properly.

5. Account for gifts and bonuses

Gift cards, prizes and other monetary rewards are treated as income in most countries. They are equal to cash, and have to be accounted for in your tax records for each employee. This is different to expenses, which we'll look at later in this guide.

It's a similar situation with bonuses, although laws can differ from one country to another on this subject. So check with your local tax office to find out how to account for bonuses in your payroll figures.

Getting this wrong can lead to financial hardship for your employees, if they're forced to pay more tax later. It might also lead to punishment for you, as the owner of the business.

Put aside plenty of time to set up your payroll accounting software to make sure it suits your business. It will save you a lot of trouble in the long run.

6. Keep your employees' information up to date

Tax codes change on a regular basis. Sometimes that's due to changing tax law, sometimes to changes in your employees' circumstances.

Make sure you stay up to date with the status of each employee. If they get married, divorced, have children or exceed a certain annual income, they may need a new tax code. Update your payroll system when this happens.

Keep your employees informed of any changes you make, so that they can confirm the details. And be sure to keep records of their wages and tax payments while they're employed by you. They may need that information when applying for a home loan or other forms of credit.

In some countries you must keep this payroll information for four years or more, even after an employee has left your company. So keep it safe.

7. Account for expenses payments

Your employees might refer to them as their own expenses. But in fact they're expenses related to your business, and must be treated as such for tax purposes. Account for them carefully.

Expenses incurred by your staff on behalf of your business must be reimbursed. Check local tax laws here, because different countries treat expenses in different ways. An allowable business expense in one country might not be allowable in another.

Be timely in your expense accounting. If you – or your employees – take too long to process an expense, it may not be legally valid. Again, check your local laws for details.

8. Take account of taxable fringe benefits

When you offer a company car, subsidized housing or free travel for an employee's partner, that's a fringe benefit. And it's taxable, just as if it were a salary payment.

This is another area in which the law varies from one country to another. As a rule of thumb, a fringe benefit will be taxable on its fair market value. Since there are different ways to calculate this, it's worth talking to an accountant or financial advisor.

Anything that has a monetary value could be a fringe benefit. If in doubt, ask your tax office. That way you won't end up with an unexpectedly large tax bill – and neither will your employees.

9. Keep pension and superannuation funds updated

In some countries they're called pension schemes, in others they're superannuation funds. The principle is the same – employees and employers putting money aside for staff retirement.

Perhaps more than any other area, this is changing all the time. That's partly because the workforce as a whole is getting older around the world. Retirement ages are creeping up, and what retirees can do with their money is changing.

You still have to account for this in your payroll accounting system. This is especially true if you are running your own contribution scheme. Get professional advice if you need it, as mistakes here could come back to bite you many years into the future.

10. Handle tax deductions with due care

When you deduct taxes from your employees' wages, you're acting as a government fiduciary. That means you're a trustee for the money, on behalf of the government.

It's your responsibility to ensure that this money is paid promptly as taxes to the government. In some regions the money is transferred quickly, but in others the process is not so fast.

If there's a time delay between wage and tax payments, keep the tax money separate from daily business operations. Look after it and take your responsibility seriously – because the government certainly will.

There's more to small business payroll than wages

Payroll isn’t as straightforward as it may seem. Managing your small business payroll means more than just paying your employees, as these ten steps show.

It's worth exploring the benefits of online payroll software to save time and effort. These programs often have the relevant notifications, reminders and forms built in. They can also automate a lot of the payroll process.

Don’t underestimate the value of hiring an accountant or financial advisor. They might seem expensive, but they can save you money in the long run. They can ensure your payroll is set up well, and help you avoid penalties.

Good small business payroll will let you forget about the day-to-day management of employee payments and income tax accounting. This will leave you free to concentrate on running and growing your business.