Essential Tips for Managing Payroll in Your Small Business
- cehibudu
- Mar 25
- 4 min read
Payroll is a critical and pivotal operations of any business as even the slightest oversight can create massive violation of the employment standards, labor Act and tax regulations which in turn could lead to myriads of grievances and lawsuits. Simply put, there is little or no room for error while running payrolls. This narrow room for error is why many workplaces enforce strict policies. It is on this premise that it becomes crucial for small businesses to manage payroll effectively and ensure employees are paid accurately and on time while keeping the business compliant with tax regulations and employment laws.
Here are key pointers and practical steps to help small businesses streamline their payroll process.
1. Develop a Payroll Schedule
Employers must establish a regular pay period and a regular pay day for employees. This could be weekly, bi-weekly or monthly and will also depend on the employee classification. Casual, hourly, assignment and temporary employees may be most suited for weekly payments while full-time employees may get paid bi-weekly. Employers must determine what schedule they will operate. It could also be a mix of weekly, bi-weekly and monthly. Choose what works best for your business and complies with local labor laws.
2. Determine How Wages are to be Paid
An employer may pay wages by either cash, cheque or direct deposit, which includes e-Transfer, into the employee's account at a bank or other financial institution. The employer can decide which of the permitted payment methods to use. Depending on the payment method, specific criteria must be met:
If payment is by cash or cheque, the employee must be paid the wages at the workplace or at some other place agreed to electronically or in writing by the employee.
If the wages are paid by direct deposit:
The account must be selected by the employee. This means the employee must decide which account to use.
The account must be in the employee’s name.
Nobody other than the employee can have access to the account, unless the employee has authorized it.
3. Determine How Much Wages will be Paid
Employers must pay all the wages earned in each pay period, other than vacation pay that is accruing, no later than the employee’s regular pay day for the period. Vacation pay for hourly employees can be paid on each pay cheque, at any time requested by the employee or at any other time agreed between the employee and the employer.
Where employees earn commissions or “bonuses” based on sales made in a pay period, the employer must decide and stipulate in the employment contract when the commission or bonus is “due and owing” or “earned” like upon the occurrence of some future event, e.g. when full payment for goods or services have been received.
To determine how much wages will be paid means will mean knowing exactly how many hours were worked especially for hourly employees. Having a time-tracking software to manage time clock punches for hourly employees can help take record of hours worked, unearth fraud, stay on top of tax deadlines and even automatically cut paychecks, among other benefits.
4. Choose the Right Payroll System
Selecting the right payroll system is the foundation of smooth payroll management. Consider the following options:
Manual Payroll Processing: Suitable for very small businesses with only a few employees, but it requires meticulous record-keeping.
Payroll Software: Payroll tools like QuickBooks automate calculations such as gross wages, deductions, net pay and tax deductions, generate employee pay stubs and reports and file payroll taxes automatically thereby reducing errors.
Outsourcing Payroll: Hiring a payroll provider can save time and ensure compliance with payroll laws.
5. Understand Payroll Taxes and Compliance
Small businesses must comply with federal and provincial/state tax laws, which may include:
Employee Income Tax Withholding
Canada Pension Plan (CPP) or Social Security Contributions
Employment Insurance (EI) or State Unemployment Taxes (SUTA)
Workers’ Compensation Contributions
Be cognizant of when state and federal payroll taxes are due, budget accordingly and make the necessary payments.
6. Classify Employees Correctly
Misclassifying employees can lead to legal issues. To avoid these challenges, clearly distinguish the types of employees you have in your company. If you are in doubt, you may want to consult an employment lawyer. Proper employee classification is cheaper long-term than expensive lawsuits. See the various types of employment:
Full-time and Part-time Employees: Subject to payroll deductions and benefits.
Independent Contractors: Paid per contract without tax deductions.
Temporary and Seasonal Workers: Ensure proper tax handling for short-term employment.
7. Ensure On-Time Payroll Processing
Late payroll can lead to dissatisfaction and legal penalties. Cutting paychecks too late can lead to dire consequences. Ensure timely payments by setting reminders for payroll deadlines and allocating funds in advance to cover payroll expenses.
8. Maintain Accurate Payroll Records
Keeping records organized is essential for payroll, audits and financial planning. Retain:
Employee tax forms (T4, T2200 etc.)
Timesheets and overtime records
Payroll tax filings and receipts
Benefits and deductions records
9. Review Payroll Regularly for Accuracy
Payroll errors can be costly and sometimes inevitable. Errors can occur innocently or intentionally like an employee forgetting to clock in or logging in for more hours than worked. To avoid these issues, it is important to audit every pay period. Even one accidentally duplicated shift can result in significant losses over time.
If these audits are time-consuming, hiring an accountant or payroll consultant will save you time and enable the business owner focus on more strategic operations. Examples of audit to conduct include:
Verify employee classifications and tax deductions.
Ensure correct calculation of overtime, bonuses, and benefits.
Cross-check payroll reports with financial statements.
10. Stay Updated on Payroll Laws
Running payroll is a heavily regulated process and regulations change frequently. To avoid non-compliance with payroll laws, subscribe to government newsletters and emails, continuously review new rules to get up-to-date information on payroll. Also develop rigid in-house policies and standard procedures to ensure a compliant, reliable payroll process.
Consult HR professionals, Payroll specialists or Accountants to stay compliant. They can provide expert guidance, ensuring compliance and financial efficiency.
Final Thoughts
Effective payroll management need not be daunting. Having the right tools and resources, staying compliant with regulations, and ensuring accuracy will aid small business owners effectively manage payroll and have enough time to focus on growing their business.
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