To the average person, payroll can seem pretty simple. You work, you get paid. If you work for a company, your employer deducts taxes from your pay. At the end of the year, you get a W-2 (or T4 if you’re in Canada) and when you file your taxes, you might get a tax refund. But the moment you start looking at payroll as the business owner yourself, and you’re responsible for paying employees, payroll gets complicated.
Payroll has a unique language and demands a significant amount of attention. Business owners must understand earnings and deductions, including relevant federal, state, and local taxes (or provincial and territorial taxes). There are also complexities of offering and tracking paid time off, medical insurance, retirement plans, and other benefits.
The price of payroll
Not only is payroll complicated, but it’s also increasingly costly. Recently, the U.S. Bureau of Labor Statistics reported that compensation costs an employer $35.28 per hour worked, when the average hourly wage is $24.10. These numbers represent an increase of 2.4% over the last year.
Payroll can be a hassle due to its complexity, but it is an essential function of every business. Compensation is the most important attraction and retention benefit for employees.
Why payroll matters
In 2016, the Wage and Hour Division (WHD) of the US Department of Labor found more than $266 million in back wages for more than 280,000 workers. These back wages were a result of employers that failed to comply with federal labor laws, either because they didn’t understand payroll legislation or they chose to ignore the rules. In the same fiscal year, WHD collected an average of $730,000 in back wages per day, which equals an average of $930 for each affected employee.
And in the 2016 Getting Paid in America survey from the American Payroll Association, 62.99% of survey respondents reported that it would be either very difficult or somewhat difficult to meet their current financial obligations if their next paycheck was delayed for a week.
Payroll means survival for your staff. The numbers are clear: if you’re not paying your employees right, you risk losing them.
According to an analysis from Society for Human Resource Management, employers spend up to the equivalent of 9 months of an employee’s salary to replace them when they leave. This means that for an employee who earns $60,000, it can cost the employer as much as to $45,000 to hire and train a replacement. It’s worth your while to do everything you can to retain your employees.
Getting payroll right
Recently, we sat down with a payroll specialist who has been working in the industry for more than thirty years, Angie Shaffer, Principal Business Analyst in the Sage Payroll Services division of Sage. She told us, “when I did payroll for a small company, I would be working directly with the owner. I’ve got news for you, when I was talking to him, he was in the kitchen cooking for his restaurant at the same time. And he would have no clue about payroll.”
Angie gives us this advice: “As a person who’s doing payroll for small business owners, don’t be afraid to ask questions.” She shared a story about how a small business owner she was working with asked her to reduce an employee’s pay by $25. But when she asked why, she learned that the employee was given a cash advance—she didn’t need to reduce his earnings, but instead his paycheck needed to reflect a cash advance deduction.
“The most important thing is that the end-of-year statement has all the correct totals for wages earned. It was not such a big deal because it was a small amount of money, but if it was a lot of money the employer could have had to pay tax penalties and interest.”
The small business owner typically has minimal payroll experience. That’s not surprising, as according to the IRS 2016 Databook, 5.8 million penalties totaling $6 billion were issued to employers for incorrect payroll tax filings in 2016. Without a payroll professional with the knowledge and skills to manage all components of your payroll, a small business risks spending a lot of money fixing mistakes.
So tell us, are you mitigating your risks and making the most of your small business payroll?