Screenshot 2025-02-06 085856

Payroll 101: The Ultimate Guide for Small Business Owners

Payroll is a critical function for small businesses, ensuring employees are paid accurately and on time. Understanding payroll processing helps maintain compliance and improve financial management.

Understanding payroll processing

1. Understanding Payroll Processing

Payroll involves more than just paying employees. It requires calculating wages, withholding taxes, and following labor laws. A structured payroll system ensures timely and accurate payments, keeping both employees and regulatory bodies satisfied.

To avoid payroll errors, businesses must track employee hours, apply correct deductions, and distribute payments efficiently. Mistakes can lead to financial losses, employee dissatisfaction, and legal issues. Establishing a well-organized payroll system from the start helps businesses stay compliant and structured.

Action Points:

  • Determine Payroll Processing Method: Decide whether to handle payroll manually, use payroll software, or outsource it to a professional provider.
  • Set a Payroll Schedule: Choose a consistent payroll cycle—weekly, biweekly, or monthly—to ensure timely salary payments.
  • Implement a Record-Keeping System: Maintain accurate records of wages, deductions, tax filings, and employee payments.
  • Stay Updated on Payroll Regulations: Regularly review labor laws and tax updates to remain compliant.
  • Ensure Payroll Accuracy: Double-check calculations, tax deductions, and employee classifications before processing payroll.

2. Key Payroll Terms You Need to Know

Understanding payroll terminology is essential for small business owners to navigate the payroll process effectively. Here are some fundamental payroll terms:

  • Gross Pay: Total earnings before any deductions are applied.
  • Net Pay: The final amount employees take home after deductions.
  • Payroll Taxes: Mandatory deductions such as income tax and social security contributions.
  • Overtime Pay: Additional compensation for employees working extra hours beyond their standard schedule.
  • Deductions: Contributions for benefits, taxes, and other obligations deducted from an employee’s salary.

3. Payroll Compliance: What You Must Follow

Compliance ensures that payroll follows national tax and labor regulations. Employers must register for payroll tax, correctly classify employees, and maintain payroll records. Non-compliance can lead to penalties and legal consequences.

Key Compliance Steps:

  • Register for Payroll Taxes: Ensure your business is correctly registered with tax authorities.
  • Classify Employees Correctly: Differentiate between employees and independent contractors.
  • Maintain Payroll Records: Keep detailed payroll records for compliance and audits.
  • Follow Wage Laws: Adhere to minimum wage and overtime regulations.

4. Choosing Between In-House Payroll vs. Outsourcing

Small businesses can either manage payroll in-house using payroll software or outsource it to payroll service providers. Each option has advantages and disadvantages.

Things to Consider:

  • Assess Business Needs: Determine whether your business has the expertise and resources for in-house payroll.
  • Evaluate Payroll Software: Choose software that meets your payroll processing needs.
  • Compare Outsourcing Costs: Consider outsourcing if payroll complexity increases as your business grows.
  • Ensure Compliance: Whether in-house or outsourced, compliance should always be a priority.

5. Avoiding Common Payroll Mistakes

Payroll mistakes can be costly. Errors such as misclassifying employees, incorrect tax calculations, and late payments can lead to fines. Using payroll software and automating payments can reduce these risks.

Best Practices to Avoid Mistakes:

  • Double-Check Employee Classifications: Ensure correct categorization to avoid compliance issues.
  • Automate Payroll Processing: Use payroll software to minimize manual errors.
  • Meet Payroll Deadlines: Set up reminders to avoid late payments and tax penalties.
  • Conduct Regular Payroll Audits: Periodically review payroll records for accuracy and compliance.

By following these strategies, small businesses can simplify payroll management, improve efficiency, and maintain compliance. Investing in a structured payroll system ensures employees are paid correctly while reducing risks and administrative burdens.

Get a free quote today!

New features to make your life easier

1) See how the tax was calculated
On the payslip screen(employee>payslip> payslip month) there are two hyperlinks that take you to how the payroll has calculated each component on the payslip. The second will give you a detailed breakdown of how the tax was calculated. click on the link. This will open a pop up window with all the details. By clicking on the page icon (top right) a drop-down menu is seen. These pages can then be printed for your records or saved as an electronic record.
2) Employees reporting to me
The manager now has read only access to the payroll information of all the employees reporting to him. This includes all the history. So he will have access to all the leave records, including all the leave applications. He will have access to all the employees personal information on the payroll. He will have access to all the payslip information on the payroll.To access the managers view, Navigate to Employee> Managers’s View and choose the employees information you wish to see.

3) Capture Comments on every transaction
The ability to capture comments on a component is now fully available. You are able to capture a comment on a specific component that will automatically pull through to the employee’s payslip for information purposes. Some examples are to record what a loan is for, what a commission payment entails or what a bonus relates to. Comments can be captured on a recurring payroll component so that it pulls through to the payslip every period or comments can be advised on a specific period’s payslip that will only appear for the given period. If there is a comment present, it will be highlighted by a small icon next to the relevant component on the Edit/Audit payslip screen, simply hover your mouse over this icon to see the details.
4) Password Aging
We have released a password aging feature that allows you to configure after how many days you would like a user to change their password. This is good practice for security reasons but we also recognise that it may mean that employees regularly forget their passwords so this feature is optional depending on your organisations security policies. Also note that an employee will not be able to select any of their last 3 passwords used should this feature be utilised. To turn on this feature navigate to Company > Basic Company Information, click on the UIF, SDL, Other tab, a value of zero in the field labelled “password expiry period” means that the feature is switched off. Enter a value in days for the system to prompt the user to change their password and click save.
5) Salary Payment File – Terminated Employees
Many clients choose to pay their employees that have given notice of termination during a month at a later stage in the month compared to their “active” employees. This allows them to finalise their pay in terms of leave pay etc and also ensures that the employees work right up until their termination date. We have enhanced the salary payment files screen (Company > Financial > Salary Payment Files) to have the ability to draw the EFT file for all employees excluding terminations that need to be paid on your regular pay date and then to run the file for only terminated employees at a month end.

5 Steps to Achieve Professional, Efficient, Payroll Immortality

Accurate efficient and deadline driven. Words that should make you feel challenged and confidant at the same time. This is the foundation for all payroll people and departments. Without these three words we cannot hope to become or remain relevant. In fact, if we are not accurate, efficient and deadline driven we will not survive the new era .
1.Communicate your expectations to line management
Line management have a reputation for ‘Forgetting” that the payroll department requires information. It is not unusual, as you know, to have to beg management for information. So, set up meetings, walk the floor, use your e mail, start a payroll department Facebook page and/or sms them the day before (some payroll programs have this built in). Just keep on talking to your customers about what you expect from them to enable you to deliver an outstanding service.
2. Agree deadlines in writing
I know this is obvious but you need something ( a contract or agreement) to make sure that the information arrives on time. Remind them gently when they miss they deadline. A funny e- mail or text showing a snail for example. In the same way reward those that are on time. (create a honor board on Facebook or send a chocolate)
3. Plan your workload
We know when we will be really busy, so plan what needs to be done , when. As the plan comes together so the monthly routines fall into place. As these routines start to become effective, and the payroll department develops a reputation for excellence, so everybody wants to make sure that the routines and procedures work. Nobody will want to be the person who does not follow procedure.(or receives the snail mail)
4. Prepare for the unexpected
Always make time, leave time to deal with the unexpected. It will happen and It will always be at the worst time. So leave yourself some time to deal with the employee who nobody knows about, or the time and attendance system not recording properly, or the unpaid leave documents that suddenly appear on your desk. to maintain your sanity, don’t take these interruptions personally.

5. Check Your Work

Lastly reconcile and balance. Make sure you have totals to balance to, and do the last month versus this month variation report. Check and investigate those funny numbers before releasing the payroll to management for approval.

Next week: Payroll automation – how that can save us from extinction.