Between keeping track of state and federal regulations and managing cash flow, payday can be a headache for small business owners. Analysis says, however, that a lot of these entrepreneurs are making payroll processing a lot harder for themselves than it needs to be.
Last year, for instance, research emerged that said more than half of small business owners handle payroll themselves. According to Nick Harvey of payroll SaaS firm Patriot Software, the finding is far from shocking.
“I’m not surprised in the least that small business owners tend to run their payroll on their own,” Harvey said in a recent interview with PYMNTS. “They assume that ‘if I only have a few employees, I think I can handle it — I’ll read up on it a little bit, run the payroll and hopefully all goes well.’ But many small business owners find out that that’s not necessarily the way to handle it.”
In an effort to prevent business owners from discovering this out the hard way, Patriot has published a whitepaper, released Sunday (Jan. 31), ranking the top 10 mistakes that companies make in their payroll procedures.
The list has some expected errors, like improper classification of workers, miscalculating overtime pay and missing tax deadlines. But there are some basic missteps that businesses are making, too, Patriot found, like not issuing W-2 forms and failing to verify new employees when they are onboarded for payroll.
Small business owners aren’t the only ones prone to these mistakes, and, according to Harvey, tripping up on payroll can lead the enterprise to take a hit in its cash flow.
“Running payroll efficiently and accurately not only assures that the deposits you’re making are timely and accurate but that you’re also going to avoid penalties and interest,” he explained.
“For smaller companies, that might not be so much, but for big companies, you could be talking about thousands of dollars in penalties and interest just because you have an inefficient process,” Harvey continued. “Really, the impact on cash flow for not having an efficient process can be astronomical.”
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With so many business owners tackling payroll themselves, finding a company out of compliance with both state and federal regulations is an obvious concern. But Harvey pointed to more basic points of friction that SMEs are facing.
Like so many problems with SME cash flow today, one of the biggest culprits of friction is paper.
“We still have an overwhelming amount of customers that choose to handwrite checks,” he explained.
Slowly but surely, he said, business owners are migrating to direct deposit solutions to pay their employees. But many remain dependent on paper checks for the ever-prominent “the check is in the mail” excuse.
“We do have plenty of customers that still say direct deposit seems complicated,” Harvey stated. “Sometimes, with direct deposit, you have to process payroll a couple of days in advance in order to have the deposit clear the bank and get to your employees’ bank accounts.”
Small business owners often depend on that lag between writing a paper check and the employee’s depositing of that check into their accounts to manage their cash flow. It’s a common tactic but one that’s misguided, Harvey explained.
“We do our best to help our customers understand what they’re really up against when it comes to payroll,” he said, adding that even for business owners that are trained in accounting, payroll is rarely thoroughly taught in such classes.
Patriot wants to help businesses, large and small, understand that as a Software-as-a-Service company, the name of the game is “automation,” said Harvey, “and making everything as efficient as possible.” It’s also about uncovering some truth behind payroll processes: paying a third-party firm to process your payroll may be costly, but adopting payroll software is often more affordable.
Plus, the added expense of implementing payroll SaaS tools is quickly outweighed by the benefits — avoiding penalties and interest from being noncompliant, streamlined cash flow and spending less time writing out physical checks to employees.
“What it comes down to,” Harvey said, “is that in the time business owners are taking to run payroll, they could be making money and focusing on their core business — versus just trying to get their employees paid correctly.”