Top 7 Payroll Concerns for Small Businesses

A smooth-sailing payroll system is important for any small business. Learn to identify obstacles, and how to overcome them

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With federal employment laws constantly changing and more states passing labor regulations, small businesses are feeling the pressure to keep up. Many of these laws are tied to both payroll and HR, complicating matters even more. In addition to complying with these regulations, small businesses must stay on top of payroll trends and implement best practices.

To give you a headstart, we narrowed down 7 payroll areas small businesses should pay special attention to. They include:

  1. Paid leave
  2. Payroll fraud
  3. Timekeeping
  4. Form W-4
  5. Exempt versus nonexempt classification
  6. Pay satisfaction
  7. Payroll outsourcing

1. Paid leave

“Paid leave may be 2020’s biggest workplace news,” according to an article published by SHRM.

States are passing paid leave legislation at a rapid rate, and since small businesses tend to have fewer resources, it can be challenging for them to monitor paid leave developments.

Among the states requiring some type of paid (sick or family) leave are:

Also, some local jurisdictions have paid leave laws that might be more generous than state law.

Whether a business is subject to state paid leave laws may depend on how many employees it has. Though that number varies by state, many small employers are required to adhere to state paid leave laws. So, no matter how time consuming it may be, take the time to monitor paid leave at the state and local levels. Even if your state or locality doesn’t currently mandate paid leave, that could change in the future.

2. Payroll fraud

It’s been reported that payroll fraud happens much more frequently in small businesses than in larger companies. When it occurs in small businesses, the impact can be especially damaging because these employers are often not financially or operationally equipped to withstand payroll scams.

Payroll fraud can be committed by:

  • Employers, such as those who engage in wage theft
  • Employees, such as those who work in the payroll department
  • Third parties, such as cyber criminals who carry out payroll diversion schemes

It’s imperative to guard your small business against payroll fraud. For example:

  • Implement strong internal payroll controls, including to prevent timecard manipulation
  • Conduct regular payroll evaluations and audits
  • Segregate payroll duties to avoid a single person having unilateral authority over your payroll
  • Provide cyber awareness training to your employees, including your payroll staff
  • Promote ethical and legal payroll practices

3. Timekeeping

This is one area no employer, regardless of size, should skimp on — particularly those with nonexempt employees. While federal law does not require you to use a specific timekeeping system, it does mandate you to pay nonexempt employees for all hours worked.

In fiscal year 2019, the U.S. Department of Labor recovered a record $322 million in back wages. (The amount of collected back wages has been increasing, year after year, for some time now.) Often, these recoveries stem from nonexempt employees filing a complaint against their employer for unpaid regular or overtime wages.

One way to stay out of the DOL’s crosshairs is to utilize a timekeeping system that improves accuracy and simplifies compliance.

4. Form W-4

The long-awaited 2020 Form W-4 is available. Be sure to:

  • Give employees hired as of Jan. 1, 2020 the new Form W-4 to fill out. If they don’t submit the form, withhold their federal income tax at the “Single” rate
  • Inform employees hired before Jan 1, 2020, about the new Form W-4. They only need to complete the 2020 W-4 if they have federal income tax withholding changes for 2020. Otherwise, you can keep using their most recently filed W-4
  • Refer to IRS Publication 15-T for guidance on withholding federal income tax based on the 2020 Form W-4 and pre-2020 W-4 forms

5. Exempt versus nonexempt classification

Figuring out whether an employee is exempt or nonexempt under the Fair Labor Standards Act (FLSA) and state law can be a migraine-inducing experience. This is probably why some small businesses simply pay their entire staff a salary and then treat everyone as exempt. Not only does this make things much easier administratively, but also financially. After all, exempt employees don’t need to be paid overtime, and it’s simpler to pay everybody a fixed salary instead of tracking and paying hours worked.

However, by automatically classifying everyone as salaried-exempt without considering their job duties, these small businesses risk violating federal and state wage-and-hour laws. The FLSA and states have strict rules for classifying employees. These rules can be difficult to interpret, so when in doubt defer to legal expertise.

6. Pay satisfaction

Pay satisfaction is about more than paying employees a fair rate/salary, as there are many other factors influencing how employees feel about their pay, including:

  • Paycheck timeliness
  • Pay accuracy
  • Pay frequency (e.g. weekly, biweekly, semimonthly, monthly)
  • Pay delivery method (e.g. direct deposit, pay card, live check)
  • Accessibility to pay information (e.g. mobile access, employee self-service)
  • Pay communications

These factors play a critical role in employee retention. You should, therefore, try to gain some insight into how your small-business employees feel about your payroll practices.

In a 2019 survey, the following percentage of respondents said they were completely satisfied with:

  • Method of payment (61%)
  • Timeliness of pay (58%)
  • Accuracy of pay (52%)
  • Frequency of pay (51%)

The survey also reveals that most employees are paid biweekly and prefer to get paid that way. Further, respondents who had issues with getting paid on time cited disorganization within the company, problems with direct deposit, and cash flow issues as top culprits.

7. Payroll outsourcing

Outsourcing continues to be a viable option for small businesses with limited resources. It may be more convenient and cost-effective to entrust your small-business payroll to an external service provider than to hire an onsite payroll team and purchase your own payroll technology.

If you’re managing payroll internally and it’s working for you, it’s a good idea to periodically perform a cost-benefit analysis to determine whether the in-house system is still the best option. For some small employers, it’s better to outsource certain payroll functions and keep the rest in-house.

Per Bloomberg’s 2019 Payroll Benchmarks Survey, the most frequently outsourced payroll activities are:

  • Tax filing (68%)
  • Unemployment insurance administration (38.4%)
  • Wage payment and gross-to-net (30.6%)
  • Global payroll (29.7%)
  • Benefits administration (27%)
  • Workers’ compensation management (19.6%)
  • Time and attendance (16.3%)

Maybe you don’t need to outsource any payroll responsibilities. Maybe all you need is a sophisticated platform that can help you cut payroll costs. In this case, be sure to choose a payroll technology vendor you can rely on.

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