By Reed Richardson.
For many start-ups and even some established small businesses, just being able to pay the bills and generate a little extra profit is a big enough challenge. As a result, seemingly innocuous questions like when and how often to pay out that money in salary—to owners, partners, and employees—often doesn't get much thought. But it should, because a company with a poorly executed pay system can easily run into legal trouble as well as send frustrated workers heading for the exits.
"Payroll is all about setting expectations," explains Bryan Dear, a former CPA who owns The Payroll Department, Inc., a payroll processing company located in Durango, Colorado. "So why not set it up in the right way from the start, so you won't have to go through a painful transition to something else later on?" Dear recommends using a payroll system that is simple and routine, yet flexible enough to adapt and grow as your small business does. "We find that paying every two weeks seems to work well for most of our smaller business clients," notes Dear. And he's someone who follows his own advice: his company's payroll system is biweekly as well.
Putting some forethought into your small business's pay periods can become particularly important if you ever anticipate having a mix of exempt and non-exempt employees working at your company. That's because many states have different pay rules regarding salaried versus hourly workers, especially when it comes to tracking and paying overtime. Also, many states have specific rules dictating the maximum "holdback" period, or how long a business can wait to pay its employees after the pay period has ended.
Select a day or a number
Perhaps the most fundamental decision regarding your small business's pay periods involves whether or not to follow a weekly or monthly calendar. A weekly pay calendar means that your company's pay periods will always begin and end on the same days of the week and that payday will likewise always be on the same day of the week, usually five to seven days after the pay period ends. A typical biweekly pay schedule might begin on a Monday and end 14 days later on a Sunday, with the eventual payday for those two weeks of work falling on the Friday five days after that.
These workweek-based pay periods offer the benefit of making paydays very predictable for both the employees and the small business owner. More importantly, if your small business also includes hourly workers, a workweek-based pay calendar makes it much easier to track hours in easy, repeatable amounts because your company's pay period will always align with the traditional workweek, unlike semimonthly or monthly pay periods, which can begin and end on any day of the week.
Monthly or semimonthly pay periods work fine for a staff of all salaried employees, but if you have to account for overtime a pay period that ends mid-week can make life difficult. And precisely because a pay period will occasionally end on a Thursday or Friday, Dear says that businesses would be wise to stretch out their paydays a few extra days to account for federal holidays and the resulting three- or four-day weekends. "If you do choose semimonthly," he says, "consider a delay of seven days between the period end date and the check date to give your organization enough time to process your payroll."
When does it make sense to outsource payroll?
Entrepreneurs often find themselves wearing a lot of different hats while running their small businesses and for companies just starting out it's not uncommon for the owner to also play the roles of bookkeeper and paymaster as well. But as a company grows, it can be increasingly difficult to carve out time to handle administrative tasks like totaling up employee hours and cutting checks. And though employees of small businesses tend to pitch in wherever they're needed and be more forgiving about mistakes, it only takes a few missed paydays to burn through whatever sense of willing sacrifice those workers bring to work each day. So, a small business owner would be wise to recognize—ahead of time—signs that they might be ready to hand off payroll to an outside firm.
"Within its first two or three years, a small business will usually get some kind of tax notice," Dear points out. And even if that letter from the IRS isn't an audit notification, he explains “that's the point when many of my small business clients have decided ‘I'm just not going to do this anymore.'"
Another common tipping point indirectly involves recruiting and hiring. If you find your company is having an increasingly difficult time attracting new talent because it lacks many of the health and retirement benefits found at larger businesses, this might be a subtle signal that your in-house payroll system is out-of-date or overmatched. While it's true that many do-it-yourself payroll software programs can handle more complicated paycheck deductions like health care premiums, cafeteria plans, vacation time, and 401(k)s, adding a simple thing like direct deposit for your employees can still prove difficult without outside help. But if you think that outside help could be your tax preparer or accountant, you might think again.
"In my experience, most CPAs don't want to deal with payroll," explains Dear, adding that “even if they do, they aren't able to do direct deposit." Fortunately, there is now a plethora of outsourcing options—from large banks and business service conglomerates to small payroll processing firms—that can quickly and easily accommodate your payroll needs for a reasonable fee. And come tax time, these outside payroll processors can really pay dividends, as they're more up to speed with the latest changes in tax law and make far fewer filing mistakes than business owners who go it alone.
In the end, how and when you pay your employees is about more than just paychecks, Dear says. "It's also about eliminating one additional issue for you to worry about, so you can focus more on running your business."
Bank of America, N.A. engages with Touchpoint Media Inc. to provide informational materials for your discussion or review purposes only. Touchpoint Media Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Touchpoint Media Inc. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.
Bank of America, N.A. Member FDIC.
©2015 Bank of America Corporation