Setting up payroll can be daunting. Get educated and avoid mistakes that can lead to risk for SMBs. Make sure your payroll is setup properly.

The unique rewards of being a small business owner are what often draw people to pursue their entrepreneurial dreams.  There are the elements of control over the creative and professional sides of the business, an ability to be flexible with schedules and lifestyle, and the benefit of being able to connect more personally with staff.

Like with any endeavor, solid building blocks are critical to the successful growth of a small business.   Though employee management and human resources are not the only foundational areas that need to be tended to in a responsible manner, they are some of the most important.

Let’s take a look at some tips on how to effectively manage a specific component related to human resources:  the seemingly overwhelming task of payroll and benefits.  This article will break down a few key ways to minimize payroll risks and common pitfalls.  Being consistent, compliant, and proactive with payroll issues will ensure your organization remains an employer of choice with the best talent on the market.

Staffing Options for Payroll

Small business owners have the basic responsibility of managing the livelihoods of their employees.  This can be an extremely gratifying role, but also one that may bring potential stress and liability.

The realm of payroll includes a set of tasks meant to ensure that employees are paid consistently and on time, are classified correctly, and that termination issues are handled in an appropriate and legal manner.

Another important task regarding compensation is to determine the most preferred payroll schedule.   Whether this entail payouts bi-weekly, twice per month, or monthly, a small business should have a consistent pay schedule and a way to track and disburse payroll efficiently.

Some entrepreneurs opt to hire a third-party payroll company to handle their entire employee wage process.   There are numerous reputable companies that can simplify the process by offering their expertise, including ADP and Intuit Payroll.  The benefits of outsourcing this task include tax expertise, accountability for tracking and disbursing funds, and financial reporting.

According to an article from Chron.com, “Inc. magazine identified payroll as the No. 1 task for small business to outsource. Because payroll management is a time-consuming activity, removing this burden can allow your employees to focus on more productive items within their realm of expertise.”

You may also choose to hire an in-house accountant to manage payroll responsibilities.   This offers the additional benefit of allowing more control and interpersonal communication between staff and the payroll division.  Ultimately, the decision is up to each organization and what best aligns with their corporate strategy and culture.

Properly Classifying Employees

It is easy to overlook how critical the framework of employee classification can be when it comes to owning a small business.   If done incorrectly, this can result in miscalculation of wages and overtime, as well as wage practices that may inadvertently be breaking tax and labor laws.   This system of classification also requires an accurate understanding since it determines specifics regarding employee benefits.

A good place to start gaining a better grasp of employee wage classification is through the Department of Labor.   This will also help ensure that an organization is in compliance with the Fair Labor Standards Act (FLSA).

Below is a brief explanation of the different employee classifications and how they can impact small business owners.  A company may also need to take into account their ability to absorb labor costs when determining an employee’s classification.

1099 vs. W-2

The difference refers to the two separate tax forms for two different classification of employees (contractor vs. employee).   A contractor is responsible for submitting a 1099 form to the IRS and calculating their own payroll taxes. A worker must pass the “right to control test” in order to qualify for contractor status.  A W-2 employee allows for their payroll taxes to be automatically deducted, and paid for, from their paycheck.

Small business owners must determine which type of employee is right for their organization, as both can have pros and cons associated with them.  Consulting with a tax advisor can aid in helping to make a decision that is appropriate and viable for your company.

Exempt vs. Non-Exempt Employees

Depending on an employee’s salary and they type of work they do, they are classified as either exempt or non-exempt per federal Fair Labor Standards Act guidelines.   This classification determines rules around wages and benefits, including overtime and minimum wage pay.

Exempt Employees: There are three main categories of exempt workers – administrative, executive, and professional – as outlined by the Fair Labor Standards Act. Note that it is not the job title alone that determines an exempt status, but rather the tasks performed.  These employees are not entitled to overtime.

Non-Exempt Employees:  Non-Exempt employees are entitled to overtime pay when they work more than 40 hours in a work week and are paid less than $23,600 per year.

It is crucial that an employee abide by the state and federal wage and hour laws to avoid the risk of legal ramifications.

Part-Time vs. Full-Time Employees

Yet another crucial element to take note of is whether to hire employees for a part-time role or a full-time role.  Not only can this decision impact employee loyalty and productivity, but it can matter in terms of what benefits are afforded to them by the small business.

For example, providing employee benefits such as health insurance, workers compensation, and unemployment may be required by state or federal laws.  These requirements can be based on the number of workers a business employs or other guidelines, so small business owners should be sure to check their state laws for mandated benefits.

Termination Issues

The cost of turnover is never small when it comes to running a thriving small business.  While no business owner enjoys considering all of the details that may go into terminating an employee, the reality is that it is going to occur at some point.  Being diligently prepared allows an employer to competently sever ties while adhering to federal and state employee rights and protecting their own business.

Some termination issues an employer may encounter is ensuring all back-wages are paid, that PTO and sick time accruals are properly tracked, and that all company property and trade secrets are preserved.

Investing in a secure and efficient system that tracks payroll and vacation time can often be a great first step to safeguarding the process of termination and avoiding disorganization (and lawsuits).

Securing your Financial Structure with Lending Options

Running a vibrant small business offers enormous perks, but can occasionally be fraught with times of insecurity or anxiety.  Employee classification and termination all play into the wide world of payroll that can make or break an organization, which is why planning ahead matters.

Ensuring a high standard of efficiency in payroll and compensation is pivotal and yet there can be times where a business may have trouble making payroll.  Perhaps timing is off for when a business receives their revenues and when their employees are scheduled to be paid.

Don’t forget that there are responsible lending options available to help small businesses recover quickly during financial l road bumps such as this.   Plan ahead by talking to an expert to learn about the variety of lending products out there to meet your needs and help achieve your small business goals.