When you’re running a small business, figuring out your payroll process is one of the first things you should do. While some employees might hang around for a few days if you hit a payroll snag, no one works for free. If you want to ensure better employee retention, you need a payroll process that ensures timely, accurate paychecks.
The Challenges of Managing Payroll at a Small Business
Very few businesses begin with the ambition of creating an amazing payroll system. Often, payroll is an afterthought for new companies, but it should be one of the first things you think about as you plan your company’s future. As a small business, you face a number of unique challenges in setting up your company’s payroll system.
Compliance With Regulations: Throughout the year, federal and state governments pass new laws about paid leave, wage garnishments, and other employment topics. When managing payroll, it can be challenging to stay on top of all the latest regulatory changes. Until you’re able to support a full payroll department at your company, the best option is generally to outsource your payroll needs.
Accurate Calculations: As a small business, knowing how to calculate payroll wages and tax withholdings can be a challenge. If you calculate these figures incorrectly, it can lead to penalties and fines. With the best payroll system and human resources information system (HIRS), you can get these calculations performed automatically.
Manual Data Entry: Anytime you enter data manually, there is a chance of committing a human error. Even though these errors were unintentional, they can still lead to fines. At the very least, payroll errors can cause higher turnover rates by creating disgruntled workers.
Data Security: Today, the global cost of a data breach is $4.88 million. Unfortunately, small businesses aren’t immune to data breaches. Because cyber criminals know that many small businesses lack strong data security, they deliberately target small companies with phishing attacks and other hacking attempts.
Administrative Work: Besides the administrative work involved in setting up payroll for a new hire, you also have to consider the long-term administrative costs. Each time an employee changes their address or personal information, you’ll have to devote labor hours to the update. Unless you use a payroll platform that enables employee access, one of your team members will have to do the work.
Cost Management: Thanks to payroll errors, administrative work, and other factors, many small businesses struggle to afford the costs involved in running their payroll processes.
Worker Misclassifications: While hiring an independent contractor means you can spend less on payroll taxes, this is only true if the contractor has been classified correctly. For many small businesses, understanding the rules about exempt and nonexempt employees can be challenging.
Technology Integration: Many different business tasks can be managed through software and other technology. However, manually copying data from one program to another takes time and leads to errors. With the best HRIS platforms, you can enjoy having an all-in-one platform and easy integrations.
Multi-State Payroll Management: As your company expands into new areas, you’ll have to understand the regulations in each state and city. Then, each employee’s withholdings must be calculated based on these rules.
What Happens If You Make Common Payroll Mistakes?
As your company grows in size and complexity, there are certain payroll mistakes that are more likely to happen. If you make any of the following mistakes, your business may experience fines, penalties, high turnover rates, and disgruntled workers.
Misprocessed Garnishments: If you deduct the incorrect amount for the wage garnishment, you can end up being liable for the entire garnishment the employee owes.
I-9 Mistakes: The employer’s portion of the I-9 form must be filled out by the third day of the worker’s employment at your organization. Additionally, each line on the form must be filled out correctly. For each spot that is filled out incorrectly, you can be charged a penalty of $281 to $2,789. The exact amount is based on adjustments for your business size, violation history, good faith, and similar factors.
Employee Misclassifications: When you misclassify a nonexempt employee as exempt or misclassify a W-2 worker as an independent contractor, you can incur major penalties. You’ll likely have to pay back the overtime, unemployment insurance, workers’ compensation benefits, and employment taxes. Because independent contractors don’t have I-9 forms, a misclassification also means you’re likely violating I-9 rules as well.
Missed Expenses: If employees aren’t reimbursed accurately for their expenses, this can lead to disgruntled workers, accounting discrepancies, and added administrative work.
Incorrect Tax Withholdings: Withholding the wrong amount of tax can cause fines, penalties, Internal Revenue Service (IRS) audits, and other issues.
Inaccurate Employee Compensation: Not reporting non-wage compensation, like stock options and bonuses, can lead to back taxes, fines, interest, and penalties. In egregious cases, it can even involve criminal charges.
Payroll Miscalculations: Sometimes, employers pay workers too much or too little. They may also miscalculate disability pay or deductions for benefits. While these miscalculations might not involve penalties or fines, there are still negative repercussions to the employer’s reputation and retention rates. With nearly half of American households saying that they live paycheck to paycheck, an unexpectedly low or delayed check can be a major hardship.
How Payroll Systems Impact Your Worker Retention and Engagement
In one Pew Research Center study, 63% of workers who left a company reported that low pay played a major or minor role. While there are few studies about the impact of inaccurate pay, late paychecks, incorrect wage garnishments, and other payroll problems, it’s safe to say that a portion of employees will quit if you make common payroll mistakes.
Even if a business isn’t concerned about making a positive, supportive work culture, they should still care about payroll because it directly impacts their retention rates. In one of the few studies done on this topic, the American Payroll Association found that 49% of employees would leave their current employer after only two issues with their paychecks.
Normally, payroll processes happen in the background, so employees don’t think about it. However, they will immediately notice as soon as a single paycheck is missed. When employees can’t pay their bills and feel mistreated, it has a direct impact on engagement rates and retention levels.
Ways You Can Improve Your Payroll Process as a Small Business
Fortunately, there are a few simple steps you can take to improve your payroll processes as a small business.
Find a Professional Payroll Provider
One of the best things you can do to simplify your payroll process is to work with a professional payroll provider like Asure. Once you set up your account, the platform will handle all of your calculations, withholdings, and deductions. At Asure, we also provide client education, audits, and compliance updates, so you can enjoy better peace of mind.
Get the Right Payroll Integrations
The right payroll system will make software integrations easy. Through straightforward integrations, you can avoid mistakes from manual data entry and reduce the administrative burden on your team. Besides integrating with HR and accounting functions, payroll software is also incredibly effective to use with your time-tracking software.
In a recent Mission to Grow panel discussion on “HR Roadmap for Growth Series: Getting Hiring & Payroll Right for 1-15 Employees,” Jessica Small, Asure’s vice president of payroll operations, talked about payroll integrations. “Using a time-tracking tool is infinitely beneficial to any employer,” says Small. “Not only is it going to help with accuracy, but time fraud is one of the biggest problems that small businesses face because it is just so hard to shuffle around those manual timesheets that are written on a napkin or out in the field, collect them, and make sense of it.”
Improve Your Payroll and HR Compliance
It’s difficult to know what you don’t know. Through the best HR provider, you can access ongoing compliance training, HR audits, anti-harassment information, and a library of compliance information.
As a small business, you can’t afford to set up a world-class payroll department. However, through outsourced payroll services, you can achieve the same results for a fraction of the cost.
Conduct Regular Payroll Audits
One of the most important things you can do to protect your company is to perform regular HR audits. During an audit, you can find out if your business is in compliance with Fair Labor Standard Act (FLSA) overtime rules, I-9 requirements, and other payroll laws. Violating these laws can lead to expensive penalties, so it’s important to audit your own practices to prevent running afoul of important employment laws.
Boost Your Employee Retention Through Better Payroll Software
Through the best payroll software, you can improve your employee retention and create a positive organizational culture. Good payroll systems operate in the background, facilitating your employees to perform their best. With the right payroll software, you can prepare your organization for future growth and ensure your team members are paid on time.
To learn more about how the right payroll systems can help your small business, reach out to our team of small business and HR experts today.