Ask any business owner about their top business challenge today, and we’d wager to say that it’s attracting and retaining employees. And, while there are a host of factors involved in keeping employees satisfied—from offering fascinating work and opportunities for development to a strong corporate culture—there’s no question that “money talks,” as in what they’re being paid.
But, what many small business owners find is that one size doesn’t fit all when it comes to wages. In fact, there are several options when considering how to pay your employees.
Consider this your guide on how to do payroll, so that you are making the best choice that will fit your specific small business model and goals, while keeping your employees happy.
Pay structure 1: Hourly rate
Hourly rates are pretty simple: your employee works x hours, and you pay them for x hours.
An hourly rate is a great option when you have work demands that will fluctuate, whether it’s because of the type of work or the seasonality. For example, your retail shop needs more hands during the busy lunch hour, or your landscaping business is mowing a lot more lawns in the spring.
Hourly employees are known as “non-exempt” employees, which means you’ll need to pay them overtime, should they exceed 40 hours in a week. Remember that these employees need to track their breaks and lunch periods, since they are not compensated for mandatory breaks.
Pay Structure 2: Salary
A salary is typically the pay vehicle of choice for someone who is going to work regular hours, day in, day out, week in, week out—whether full-time or part-time. They are typically considered “W-2” employees, which refers to the way their taxes are withheld.
Someone on a salary isn’t paid for extra hours, so if your employee helps with a special event one weekend, they won’t make more money unless you have created those arrangements. (Although many bosses, of course, may encourage their employees to leave early a couple of afternoons the following week, or another similar arrangement, as a goodwill gesture.)
With salaried workers, you’ll arrive at their pay rate by determining how much they will be paid annually, then dividing that by the number of pay periods—while it’s typically two a month, you also can choose to run payroll weekly or monthly.
To make your salary-related payroll easier, a paycheck calculator will estimate net vs. gross pay for W-2 employees after federal and local taxes.
Salaried workers are typically considered “exempt,” in that they don’t officially keep track of the hours they work. However, if you are on a salary arrangement with part-time employees, they would need to be compensated for additional hours outside of the scope that has been agreed upon. When considering hourly vs. salary, all these considerations come into play.
Pay-structure 3: Commission
Some small business owners may choose to pay their employees a “commission,” which is a fee paid for a specific service, such as making x number of sales or completing production of x number of widgets.
Commission can come in two forms: it can be the entire means of payment in lieu of a salary, or it can be a “bonus” over and above the regular salary or hourly pay. You can structure the commission as either a flat fee—as in $100 for every sale, or a designated amount for a certain number of sales—or one that is percentage-based, such as a 5% commission on every sale.
Commissions are most often applicable to sales tasks because they are the ideal incentive to sell more. If you have a particularly prolific salesperson, you might decide to “cap” their commission, which means they only receive commission up to a certain amount, like $50,000.
An uncapped commission means that employees can keep racking up the bucks with every sale. It’s up to you to determine which structure is better in the long run—you might be paying out more in commission, but the incremental sales or production might be worth it.
How to determine how much to pay
No matter what type of compensation model you use, you want to make sure you are paying both a fair wage and one that will keep your employees satisfied. To find that happy medium, look around at job postings for similar jobs in your geographic area and then consult other resources, such as the Bureau of Labor Statistics or a job site like Salary.com.
In addition, you will want to make sure you’re following all applicable laws, since minimum wage varies not only state, but also by county. The Fair Labor Standards Act (FLSA) is your go-to resource to ensure that you are complying with all appropriate standards. Make sure that you understand the implications of exempt vs. non-exempt employees when considering how to calculate payroll. With an exempt employee, you don’t need to adhere to minimum wage or overtime requirements, but you want to make sure that you are clear on which category each employee is in, so you do not run afoul of the law.
It’s also important that you post official labor law posters following all mandatory posting regulations, such as making sure they are present at every site. (A subscription service can help ensure you are always compliant with the latest poster, as laws change frequently.)
What you need to know about payroll processing and payroll services for small business
Whether you choose hourly, salary, commission or a hybrid as your compensation structure, you want to make it as easy as possible to manage your small business payroll—and get back to the work you most want to do.
As an employer, you also need to know your responsibilities toward tax withholdings for federal taxes, Social Security and Medicare for your employees when you run payroll. You must consider whether employees are exempt vs. non-exempt, as that will factor into whether they receive overtime.
A payroll calculator is a great place to start to determine how much to pay each employee. In addition, most small businesses rely on online payroll services. It’s important to consider the ease of use of your payroll services with a payroll software for small business that’s simple and accurate—and offers features that your employees will appreciate, such as online direct deposit.
Small business payroll can also be simplified by using payroll systems that make it easy to track hours and commissions, which are then used to generate the calculations for payroll processing.
You’ll want to decide if you will send checks weekly, bi-weekly or monthly, and then adhere to the schedule diligently so that your workers know they will be paid on time. After all, they have their own bills to manage and need to rely on a steady paycheck.
Once you’ve distributed the paychecks, your work is not quite done. You will have ongoing requirements for paying the taxes you owe on your employees. Most businesses need to submit Form 941 quarterly; however, if your annual liability for Social Security, Medicare and withheld federal income taxes is $1,000 or less, you can fill out Form 944, which is only due annually.
And, you’ll need to ensure that you are retaining your payroll records: the U.S. Department of Labor (DOL) Wage and Hour Division requires you to keep records for each non-exempt worker that include background information on the employee, along with data on hours worked and wages earned, including the regular pay rate and any overtime earnings. Keep payroll records for three years, as specified by the DOL.
Small business payroll services that pay off
Finally, we know you are wondering, and yes, we do have a payroll software solution to suggest: QuickBooks® Payroll. It’s many features and ease of use have made it the No. 1 payroll provider for small businesses, and we think you’ll appreciate how it can help you get more time back in your day, while ensuring your employees are paid accurately and on time.