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Payroll

Paying employees fairly, legally and on time is an important part of running a business. But with taxes, tracking paperwork and setting a payroll schedule, it can be hard for busy small business owners to know where to begin. If your company grows and your number of employees increases, you’ll need to be familiar with the legal requirements around payroll, create a set schedule for paying employees and build a master plan for keeping employee and tax records.

Payroll

Payroll is the process by which companies pay their employees’ wages. For many businesses with employees, payroll is their biggest expense. It can also be a complicated process to manage. You’ll need to track time, classify employees, collect employee health insurance premiums and retirement contributions and pay taxes, which requires careful planning and recordkeeping.

When it comes to payroll, there are three ways to approach it: handle it yourself, use a payroll service or hire an expert to do it for you. No matter which approach you take, it’s still your responsibility as the leader of the business to know basic payroll laws and requirements.

Know the requirements
Employees of a small business are covered by national, regional and, sometimes, local employment laws. Check with your government agencies for regional and local laws that apply to your business. Research rules in your country for:

  • Current minimum wage and overtime laws
  • Exempt and nonexempt employees
  • Overtime
  • Child labor laws
  • Tipped wages
  • Hours worked
  • Travel time
  • Waiting time
  • On-call time
  • Sleeping time
  • Meeting and training time
  • Permitted to work
  • Vacation time

Decide on paid holidays, vacation and sick time
As you approach setting a payroll schedule, you’ll also need to decide how many paid days off you want to offer your employees, if any. Although paying employees for days they haven’t worked isn’t required by federal law, it may be required by state and local governments, and offering this perk can help you stay competitive with other companies and attract better employees.

Holidays
Holidays are offered by many employers and they vary by country.

Many businesses also offer paid or unpaid days off that employees can use for religious holidays, along with bereavement leave (time off work in the event an employee’s family member passes away).

Vacation time
Globally, businesses offer employees vacation time based on a number of different factors and vacation time provided varies from country to country. You can decide whether you’d like your employees to finish a certain amount of time before tapping into this benefit. This could be a year of work or a probationary period (meaning an introductory period). Some business owners have employees earn paid time off each month (for example, 8 hours per month), which can be taken at any point after the time is earned.

Sick leave
Requirements for sick leave change from place to place. Even if your local laws don’t require you to provide it, giving employees paid time off for illness can help you stay competitive as an employer and may even save your business money. For instance, if a sick employee comes into work, he or she could make you or any other employees sick, costing you valuable resources over a longer period of time. If that person is serving your customers directly, he or she could also get your clientele sick, leading to unhappy clients.

Whatever leave you decide to offer, it’s wise to explain it clearly to new employees in writing, and to include it in your employee handbook if you have one.

Getting started with payroll
Between managing employee paperwork, collecting taxes and making payments to the regional and national entities, payroll can be an intimidating task. Here are some of the steps you can take to set up payroll for your business.

1. Set a pay schedule
This is the schedule that defines when you’ll pay employees for a particular amount of time worked. Most pay periods are weekly, bi-weekly or monthly. Decide what will work best for your business depending on whether you want the simplest option in terms of paperwork and calculations (weekly or monthly) or the one that most employees prefer (bi-weekly). Every region has unique pay schedule requirements, so be sure to check the laws in your region or country.

2. Classify employees
You’ll need to make sure your employees are classified correctly for their own benefit and for that of your business. These are the main categories of employees to know.

    Non-Exempt: This is an hourly employee who must be paid at or above the required federal, and, where applicable, local minimum wage, plus overtime in accordance with federal and state regulations.

    Exempt: This is a salaried employee who will not have some of the rights and protections given to non-exempt workers, like overtime. To be considered exempt, an employee must earn the minimum salary threshold established by state law (or the FLSA where there is no state law), receive a guaranteed salary and perform certain duties defined by state law or the FLSA.

    For help determining whether an employee is non-exempt or exempt under national law, visit the the appropriate government agency website.

    To determine whether your country imposes additional standards, visit the website of your local department of labor. It’s also a good idea to consult with an attorney.

3. Learn the tax basics
Both employers and employees need to pay national income taxes, along with regional and local taxes in some areas.

Healthcare fees and retirement contributions will also need to be taken out of your employees’ paychecks each pay period, depending on the benefits you provide and that your employees select.

For more details on national employment taxes, visit the appropriate government agency website. It’s also a smart idea to check with an accountant or tax advisor as you begin hiring employees, just to make sure you’re handling payroll taxes correctly.

4. Plan out timekeeping
As an employer, you’ll need to keep track of how many hours your employees work. Most businesses have non-exempt employees record their own time, with the owner approving those hours each pay period. Many businesses also track the time worked for exempt employees for a myriad of reasons, including easier payroll administration and benefits management. There are countless software options you can use to help.

5. Keep records for each employee
Anytime you welcome a new employee into your business, you should create a folder with the following pieces of information. Recommended information includes:

  • Employee's full name and individual tax identification number or applicable employee id
  • Address, including postal code
  • Birth date, if employee is a minor
  • Sex and occupation
  • Time and day of the week when employee's work week begins
  • Hours worked each day
  • Total hours worked each work week
  • Basis on which employee's wages are paid (per hour, per week, by project, etc.)
  • Regular hourly pay rate
  • Total daily or weekly earnings
  • Total overtime earnings for the work week
  • All additions to or deductions from the employee's wages
  • Total wages paid each pay period
  • Date of payment and the pay period covered by the payment

Check out the website of your local department of labor to learn about region-specific recordkeeping requirements.

In addition to the required documents, maintain a record of the employee’s salary and benefits, and consider keeping reviews, accomplishments and other documentation in the folder, as well. To keep this process as simple as possible, you’ll need to set up a system for collecting and maintaining each piece of information, whether it’s a file folder, a digital folder or both.

Payroll options
You’ve learned the basics about payroll. Now it’s time to decide whether you’ll be handling the process yourself, using a payroll service or hiring an accountant to help you. Here are some of the benefits, drawbacks and steps involved with each option.

1. Do it yourself
This option is the lowest in cost, but also the most time consuming, especially if you have multiple employees or other complicating factors in play. It can also lead to more errors, which can cost you in the form of legal or tax penalties.

You may also want to choose payroll software to support you as you begin the process. For more on keeping great business records check out our recordkeeping tips here.

2. Use a payroll service
There are many payroll services available, with service available at a modest cost per worker per pay period, depending on the services and features included. Some perks of this option are that you can spend less time on payroll and more time managing the business, and that you can get individualized payroll advice. The downside is that it will cost more than doing it yourself. Most services charge employers either by month or by payroll. Note that you’ll still need to keep employee records and track employees’ time worked. Here are a few things to think about when researching which service to use:

  • Cost. Are there are a range of packages, and which one best fits your needs?
  • Software used. If the solution is technology-based, does the software integrate well with the accounting software you use?
  • Employee access. Many services allow employees to view their pay stubs and other information online.
  • Support features. Do they offer 24/7 support, and is it by phone or online?
  • Liability. Will they assume responsibility if there is a payroll error, or related tax issue?

3. Hire an expert
The most expensive option is also the one that will require the least time and headaches on your part. Generally, accounting services costs vary between $500 and $3,000 per month depending on the accountant’s experience. These fees generally cover accounting services and support beyond payroll. If you’re able to hire someone who you know is skilled at payroll, you may be able to get similar support for a lot less. One added benefit of using a payroll professional is that this person may also be able to help out with other areas of the business, like giving you advice on expense tracking, helping you open a business banking account and making sure your overall business accounting meets regulations. Using a professional can reduce your liability, as well.

If you do decide to hire an accountant, here are a few tips for finding the perfect fit:

  • Consider looking for a certified or chartered accountant. Although more expensive, this professional will be more highly qualified and will have degree-level training, meaning their services and advice are likely to be more accurate and can potentially save you more money in the long run.
  • Ask about relevant expertise. Does the person have experience handling accounting for businesses of the same size and in the same region as yours? You can ask for a client list to see which businesses they’ve helped at a glance.
  • Check their software experience. Are they familiar with the technologies you already use in your business?
  • Interview them carefully. Because this person will be handling sensitive financial and employee information for your business, you’ll want to be sure he or she is reliable, skilled and honest about their qualifications. After the interview, make sure to check references and even consider running a background check.
  • Decide on virtual or local. Would you rather have someone you can meet with face-to-face, or are you comfortable communicating by email, phone and video call?

When it comes to planning and running payroll, knowledge is half the battle. Whether you handle the task yourself, delegate it to an employee or hire someone to manage it, it will take some work and planning to get off the ground. Just remember that keeping payroll information confidential is important, so only rely on trusted staff or professionals to handle the job. Once you have a good system in place, it’s likely to get easier with every pay period.

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