Most entrepreneurs don’t go into business with the goal of spending their time processing payroll. If you’re like them, you’d probably rather focus on keeping your products or services competitive and your clients happy. However, managing payroll is a critical aspect of running any business with employees, and it can present a wide variety of challenges. It’s vital to get it right: Paying employees inaccurately or late can seriously damage staff morale, and non-compliance with tax or labor laws can lead to significant penalties.
What’s Important to Bookkeepers When Processing Payroll
For bookkeepers in small businesses managing payroll can present a significant burden, especially since they’re generally also handling many other accounting tasks every day. When handled manually, calculating wages, taxes and other payroll deductions can be a time-consuming process that requires great precision to ensure employees are paid accurately and that the company complies with all regulations.
If the tools they are using to manage payroll aren’t integrated with their accounting system, they’ll need to enter payroll data multiple times to keep the company’s accounts up to date. Anything that simplifies and automates the tasks of payroll processing is likely to be welcomed.
16 Common Challenges for Small Businesses and Their Solutions
Here are 16 of the most common payroll challenges encountered by small businesses, and their solutions.
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Manual payroll processing. Manual processing with spreadsheets or other basic tools can seem a cheap option, and it may be adequate for very small businesses. But it’s time-consuming and error-prone, and the complexity and risks increase as your business expands and you add employees. There’s no built-in mechanism to avoid mistakes, stay up to date with regulations or protect confidential information. That’s why it generally makes sense for growing businesses to automate the process using technology from a software or a payroll service provider.
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Staying in the loop with employment law and regulatory changes. It would be nice if laws and regulations didn’t change. But they do—and there are federal, state and local regulations to contend with. If you fail to notice regulatory changes and incorrectly calculate employee pay or tax liabilities as a result, you could face significant fines and penalties. Good payroll solution providers should automatically stay up to date with changing regulations, but regular staff training is also important: you don’t want to learn the hard way.
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Record keeping. Maintaining accurate records is important not just for business purposes but also for compliance. The Fair Labor Standards Act (FLSA) mandates that records of employee earnings must be kept for at least three years, for example. Even if you have an on-staff payroll specialist who’s obsessed with record-keeping, it makes sense to use payroll solutions designed to ensure accurate and compliant storage.
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Privacy and confidentiality. Read the headlines: Another day, another data breach. But you can’t run a payroll system without highly sensitive data such as bank account and social security numbers, home addresses and pay rates. That exposes your business to risk. Every company needs clear privacy policies and a secure environment for payroll records, as well as strict internal controls over who can access sensitive pay-related information.
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Under or over payments. People don’t like to be underpaid—or to be asked to return money if they’re accidentally overpaid. If you don’t catch problems early, these errors can also complicate year-end accounting and W-2 processing and require time-consuming corrections the following year. Automated solutions can help by reducing the chance of manual data entry or calculation errors. If you do discover an erroneous payment, inform the employee as soon as possible and work tactfully with them to correct it without causing financial hardship.
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Misclassification. Even small companies may have a mix of full-time and part-time employees, temps and independent contractors. Misclassification—such as incorrectly categorizing an employee as a contractor—can cause serious problems for the business and for employees. For example, employees may be entitled to company benefits and unemployment compensation, while contractors generally are not. Make sure you understand the rules; misclassification can result in significant penalties.
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Tax non-compliance. It’s generally the responsibility of the business to calculate and withhold employee taxes correctly, as well as paying the employer’s share of payroll taxes. The IRS has a strong motive to pursue businesses that get it wrong: payroll taxes withheld by employers comprise nearly 72% of all revenue collected by the agency. That’s another reason to seek out payroll solutions that automate tax withholding and filing and cut the chance of manual error.
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Managing changes. Even minor changes to employee information can cause payroll problems. If an employee moves to a different tax jurisdiction and you don’t update their address promptly, you may be calculating tax withholding incorrectly, for example. Payroll solutions that include self-service capabilities can help, enabling employees to update their information and relieving the burden on your payroll staff.
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Data management and reporting. Because payroll is often a company’s biggest cost, it’s critical to be able to analyze payroll data and its impact on profitability. It can be difficult to do that if you’re trying to manage payroll manually. How long would it take to answer the question, “How much would we have to increase our staff to cut our overtime costs by 80%?” Software that makes reporting easier can help support tactical and even strategic choices for the whole company.
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Technology integration. The potential benefits of powerful payroll software can be compromised by a lack of integration with the organization’s other business systems. Manually transferring data among multiple systems is a common source of data integrity issues. Transferring data in batches between systems may be sufficient for straightforward, time-insensitive changes, but for full integration you generally need to use applications that are supplied as a suite or connect via application programming interfaces (APIs) that transfer data in real time.
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Maintaining or lowering payroll costs. When it comes to administrative costs such as payroll, businesses are constantly challenged to do more with less. Fortunately, most modern payroll solutions require significantly less administrative effort and cost than managing payroll manually—which also frees up staff time for more productive activities. Cloud-based payroll solutions are accessed over the internet and purchased as a subscription, so you generally don’t need IT specialists or capital investment in on premises computer systems.
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C-Suite buy-in. It’s always challenging to persuade everyone in the organization to switch to a system, even if you know it will be more efficient. To persuade decision-makers to buy in to a new payroll solution, pick metrics that matter to the person you’re talking to. The CEO will relate to greater employee productivity that leads to better business performance. For the CFO, ROI over five years may be the best metric. For the CIO, watchwords are enhanced security, speed, automation and reliability.
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Payroll accuracy. Human error is a major cause of payroll inaccuracies—which can lead to employee dissatisfaction and compliance penalties. Payroll solutions reduce the need for data entry, saving time and increasing accuracy. It’s especially helpful if systems enable employees to check and edit their own personal information. Accurate data also means that you can use payroll information for forecasting and business analysis with greater confidence.
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Backup systems. You don’t need to be a payroll expert to understand the scale of the disaster if the system fails and there is no good backup. If you run payroll on in-house systems, consider keeping backup data or an entire replicated system in another physical location to protect against problems like fire or theft. If you use a cloud-based payroll system, your data should be backed up automatically in the cloud—but make sure you use a provider with a good track record.
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Payroll fraud. Payroll fraud is a serious threat to businesses, such as an employee falsifying a timecard by entering excess overtime or a higher-paying shift. Timesheet signoffs and expense audits are standard solutions. Fraud can be easier to spot with payroll solutions that enable you to quickly run reports and analyze data for suspicious trends and outliers. Another growing threat is payroll diversion, in which criminals obtain employee logins via phishing emails and use the credentials to change payment information. Cyber security training can help employees spot the threats.
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Standardization. When different parts of a growing company use a variety of disparate processes and tools, it can hinder efficiency and make it difficult to get a good view of performance. Standardizing on a single payroll system can reduce the overall payroll processing effort required and simplify analysis and reporting.
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How Automation and Software Can Help
Automating payroll processing through software can help to solve these challenges. A good payroll software provider will keep up with all tax laws and other legal requirements, automatically update payroll calculations, and pay employees via direct deposit or other methods. That can help to keep employees happy and keep the company legal. Payroll software eliminates most manual data entry, especially if it’s integrated with accounting, human-resources, and other business applications. It helps companies analyze payroll spending—typically one of the biggest business costs—to maximize efficiency and create better forecasts.
“SuitePeople Payroll has streamlined most of our personnel processes and has removed a lot of the data integrity risks of keeping multiple systems up to date.”
