Did you know that approximately 90% of businesses fail during the initial stage, with few passing the five-year mark? Among the many challenges restricting the potential of small businesses is the lack of market fit, human resource management issues, and payroll inefficiencies disrupting cash flows.
Managing payroll for small businesses is crucial as it often represents a significant portion of a business’s expenses and comes with legal obligations.
However, it is also one of the most confusing, tedious, and time-consuming business activities. Not to mention, hiring professionals to handle this process comes with additional expenses.
Errors and inefficiencies in managing payroll for small businesses can result in expensive legal issues, fines, and penalties.
Especially in the context of the Middle East, which governs the timely and accurate release of payroll to protect the rights of employees, this becomes a sensitive operational function that demands a keen eye for details.
This article will give a simple breakdown to all you need to know when managing payroll for small businesses effectively.
1. Create a Payroll Policy
Managing payroll for small businesses should start with a well-defined, strict, comprehensive, and efficient payroll policy. This should give a clear overview of how you expect to manage the company’s payroll.
A good payroll policy should have details about the frequency of payroll, i.e. how often the payroll will be processed, such as weekly, bi-weekly, semi-monthly, or monthly.
It should also include a proper outline of wage or salary calculations, including overtime, bonuses, and deductions. This helps employees understand how the business calculates their salaries. Most importantly, while creating the payroll policy, you must ensure that it fully complies with federal, state, and local tax laws.
Overlooking this can put all your other efforts at establishing an effective payroll system in vain, as breaching legal obligations can result in expensive consequences or even the closure of a business.
Keep in mind that a well-defined payroll policy provides consistency and transparency in payroll management. To simplify this process, small businesses can maintain more than one payroll policy for different categories of employees.
2. Set Up a Payroll System
Once there is a well-defined payroll policy, the next step is to create and set up a payroll system that can help follow them. Today, with the advancement of technology and information, there are many ways a small business can set up a payroll system. The decisions should be made after analysing the needs, budget, available resources, and convenience. Here are three options to consider:
(A) Manual Payroll:
A manual system can be one of the most obvious choices for managing payroll for small businesses with limited employees.
This system typically involves paperwork and takes a more pen-and-paper approach to record attendance and calculate wages. It also takes little expenses with maintenance.
However, as this system is managed by human labour, it can be time-consuming and prone to errors and inefficiencies. This is why small businesses should focus on automating payroll management where possible.
(B) Outsourced Payroll:
While many assume outsourced payroll is expensive, the efficiency, accuracy, and ability to minimise sensitive legal errors from this option offset the benefits when managing payroll for small businesses.
Through this, startups can save costs in the long run by avoiding legal issues and fines, reducing errors, and having enough time to focus on other core areas of business growth and human resource management.
Not to mention, it also eliminates the need to hire payroll professionals and maintain a team for this function. Compliance also becomes very easy with outsourced payroll, as the team is dedicated to staying up-to-date with regulatory changes concerning payroll function.
(C) Payroll software:
Startups can also consider an effective customised payroll software to manage their payroll. Software solutions are also cost-effective and efficient, minimising the room for errors and delays.
With payroll software, businesses can automate most of the payroll processes like salary calculations, tax deductions, report generation, and data analysis.
Additionally, payroll software eliminates the scope for human errors and offers accuracy, time savings, and data security.
3. Ensure Proper Categorization of Employees
A common reason payroll management for small businesses becomes complicated is the different employee categories, the tax implications, and the wages for each.
Categorising employees based on their contracts and the nature of their jobs can simplify payroll and human resource management better. Your employees can be:
(A) Salaried vs Hourly
This is one of the most common categories of employees in many small businesses. Salaried employees will receive a fixed monthly or annual salary, regardless of the hours worked. Meanwhile, hourly wages depend on the number of hours worked.
(B) Full-Time vs. Part-Time
This category of employees is based on the number of hours they work per week. Generally, full-time employees work 40 hours a week, or 8 hours a day for five days, and they receive more benefits. Part-time employees work less than 40 hours a week.
(C) Exempt vs. Non-Exempt
This category determines whether workers can work overtime. Only non-exempt employees who work more than the required number of hours per week are eligible for overtime wages.
4. Choose a Payroll Schedule
Having a pre-defined schedule simplifies both payroll and human resource management. Especially in the Middle East, there is a timeframe by which organisations should release the payment for their employees monthly. This policy is governed by law through a WPS (wage protection system).
Besides this, you can also set up a payroll schedule for weekly or bi-weekly payments if you have employees on such contracts.
Whichever option you choose, make sure to choose a payroll schedule that fits your business’s cash flow, operations, and employee preferences.
5. Keep Updated with Tax Rules and Laws
One of the areas that cannot be overlooked within both payroll and human resource management for small businesses is compliance. Setting up a payroll policy and system should be done in accordance with tax rules and laws. Doing this is crucial to ensure an efficient payroll management system.
Besides this, startups should also be updated with the latest regulatory changes concerning payroll, and it is an ongoing responsibility. Adherence to tax laws is a requirement to avoid legal complications and hefty penalties.
Streamlining Payroll Processes for Small Businesses
While understanding the ins and outs of effective and efficient payroll management for a startup may sound confusing, it can be simplified to a great extent with proper planning. Start by analysing the nature of your business and its payroll landscape.
Then, define a policy and narrow down the best choices for implementing a system, whether it is a manual, automated, or outsourced payroll solution. Once a system is in place, make sure it is compliant with the latest payroll laws every time.
These three key steps are all it takes to ensure the proper management of a payroll system as a startup. It is also highly recommended that you seek professional support to help you navigate the dynamics of payroll complexities wherever possible.
