Why Is Payroll Important for Small Businesses?

Payroll is a critical function for any small business that has employees. It’s also a complicated function that has many aspects and comes with a host of regulations to follow. Small business owners generally have to do a lot of homework to understand the intricacies of payroll so that they can do it correctly.

Fortunately, there are many online resources, such as humanresource.com, that offer helpful tips and guidance.

Here we will cover exactly why payroll is such an important process for small business owners to master.

Legal Compliance and Risk Management

The laws that govern payroll are many and include:

  • Fair Labor Standards Act (FLSA) – includes minimum wage and overtime requirements
  • Federal Insurance Contributions Acts (FICA) – payroll taxes that fund Social Security and Medicare
  • Federal Unemployment Tax Act (FUTA) – payroll taxes that fund unemployment insurance programs
  • Equal Pay Act (EPA) – prohibits wage discrimination based on gender.

Employers must ensure that they comply with all of these regulations by paying wages and overtime that comply with the laws and by withholding and paying the appropriate taxes. States also have their own payroll laws that must be followed.

Withholding taxes properly is tricky if you’re doing it manually, especially since you have to calculate withholdings at the federal, state, and local levels. Each employee will have a different withholding structure based on their W-4.

Employers also need to make sure that they make timely payroll and withholding tax payments according to federal, state, and local deadlines.

Non-compliance with regulations can lead to fines, penalties, and interest. Violations of the Equal Pay Act can be even more costly if employees who feel discriminated against file civil lawsuits.

Employee Satisfaction and Retention

Employees expect to be paid correctly and on time, and rightly so. Mistakes in payroll, more than anything else, can create employee dissatisfaction which can lead to them seeking other opportunities.

Employee turnover is expensive for small businesses, so proper payroll management is critical to maximizing employee retention.

Failing to pay the proper wages and overtime can even lead to legal action by employees, which means legal expenses and bad publicity.

Keeping employees happy when it comes to payroll is an important part of your overall company culture, which should be one in which all employees feel valued and well-treated. A good company culture can be more important than wages when it comes to employee attraction and retention.

Financial Management

Many businesses fail due to poor financial management, and failing to properly manage payroll is often the culprit.

Payroll processing and administration comes with a cost which needs to be included in the budget for the business. Payroll expenses can add up, so it’s critical to include payroll in the business’ overall financial management structure.

Often, new business owners fail to plan for all payroll expenses, including payroll taxes, which can lead to cash flow issues. Cash is king for any small business, so payroll expenses should be part of your cash flow forecasting process.

Often, small business owners are experts in their field, but not in finance. It’s expensive to hire a full-time professional to handle your financial management needs, but you can outsource the services of an accounting firm to help you. Some companies even offer outsourced Chief Financial Officer services which can be well worth the cost. An experienced CFO can help you to build a financial strategy that can significantly improve your bottom line.

Record Keeping and Data Management

Managing payroll records is also important to comply with payroll laws, and to be able to properly generate employee tax forms. Also, when issues arise, records need to be easily accessed to resolve problems and provide documentation to any relevant parties.

Payroll data management is also a critical part of decision making. You need to know the total cost of adding a new employee, or the cost savings of removing an employee. How you staff your business should be an important part of your short and long term strategic plans.

Data security and confidentiality are also critical to manage. The cost of data breaches in small businesses can be huge. Some estimate that the average cost to a small business of a data breach is about $150,000, which is a cost that most businesses cannot afford.

Outsourcing Payroll Services

Payroll is complicated! That’s why most small businesses choose to use payroll software or to hire a payroll service. Doing so, of course, comes with a cost, but it can save you hours of time that is better spent on running and growing your business. A payroll service is also much less expensive than hiring an employee to manage your payroll for you.

Using a payroll service can also ensure that you stay in compliance with all regulations. Some payroll services even offer additional human resource services and tools that can help you manage your HR functions.

A payroll service can also ensure that your employee and payroll data is secure, which can give you great peace of mind, since data breaches can be so costly.

You’ll need to shop around to find a payroll service that offers flexibility and customization to meet your specific payroll needs, and also one that fits into your budget. Payroll services vary greatly in terms of the features they offer and the prices they charge, so be sure to do your homework to find the one that’s the best fit for your business needs.

You should also investigate customer reviews of a payroll service before choosing it. You want a service that offers good customer support and that does not have a history of errors. The Better Business Bureau and TrustPilot are excellent places to find company ratings and reviews.

In Closing

Payroll is a time-consuming and complex process and doing it the right way is critical for your business. The laws surrounding payroll and payroll taxes are many, and failure to comply can be costly. Just learning how to do payroll takes time that could be better spent on activities that can help you to reach your business goals.

It’s highly recommended that you engage with a payroll service so that you stay in compliance and can make better use of your precious and limited time. You’ll find that it’s well worth the investment.

Rylie Holt