Payroll Processing Blunders: How Growing Businesses Can Avoid Headaches, Penalties, and Accidental Resource Drains

By Ritika Puri

5 min read

Problems with payroll processing can creep up on you. Mismanage your data—by using spreadsheets or other manual tools—and bam, you could end up slipping on a financial banana peel without even realizing it. No matter how meticulous you are with your calculations, you’re a human being. Your passion is your business—not the systematic complexities of piecing together software.

So if you sometimes feel like you’re throwing darts in the dark, you’re not alone. For tax year 2016, the IRS issued more than $6B in penalties for employment taxes, according to research from one law firm. These mistakes are far too easy to make for small businesses that often rely on minimal resources.

“None of these penalties should have existed,” says Charles Read, president & CEO of GetPayroll, a company that specializes in building payroll systems. “Payroll is very complicated and most business people do not understand all of the various and sundry ramifications of what they are dealing with.”

As an entrepreneur, my co-founder and I learned the hard way how easy it is for finances to cause a business to struggle. Between 2015 and 2016, our company doubled in revenue while also experiencing a cash flow jam that nearly upended our business. That’s why, when we implemented our first payroll system in 2016, we took a conservative route, with extra layers of due diligence, to create a process that would scale with our organization.

1. Don’t DIY—Outsource Your Payroll Processing Off the Bat

My co-founder and I fall into the category of “business people [who] do not understand all of the various and sundry ramifications of what [we] are dealing with.” We both came from enterprise, corporate backgrounds and took for granted how many HR complexities were happening behind the scenes. As we’ve learned to run and evolve our business over the last few years, we’ve are strong with managing profits and loss reports, making sure that our business is healthy, and helping our customers achieve their goals.

We realized off the bat that we would need a partner to help us architect a payroll strategy that would not only keep us compliant and pay our team on time but also avoid getting stuck in the payroll rabbit hole.

After a year of debating whether to build our own system, we chose to work with a preferred employer organization (PEO), which is a type of firm that manages employee benefits, payroll, workers’ compensation, recruiting, training, and development. PEOs exist to support small businesses that cannot afford in-house HR teams or costly consultants. The legal relationship is that the PEO essentially leases our business and its employees.

The PEO that we chose supports 14,000+ small business customers, manages $34B in payroll annually, and has been in business for 25 years. We work with this organization on flexible contract terms, and we maintain ownership over our systems. Because this organization manages payroll at such a massive scale, for companies all over the United States, we can sleep peacefully knowing that our payroll is essentially on autopilot.

Currently, our organization has only two employees and works with a partner network of 28 independent contractors. Our annual revenues are under $1M. We were surprised to learn how affordable a PEO could be, even for companies as small as ours—we plugged a solution that provides us with the same payroll processing infrastructure of a larger organization. Because the PEO is scalable, we may never outgrow the infrastructure that we’ve implemented as a two-person core team.

2. Make Paperless a Goal

Two words can simplify payroll: direct deposit. When you’re issuing paper checks, it’s easy for things to go wrong, with many more moves to track. With a fully digitized system, it’s easier to ensure that nothing falls through the cracks.

When we implemented our payroll system, for instance, we encountered an error in which our checks arrived at the wrong location—twice. In our case, we went straight to the address to reclaim our funds. Our other solution would have been to void the checks and re-issue them.

Lost checks aren’t the fully extent of what could go wrong, however. Tax accountant Tom Williams explains what he’s seen go wrong:

“Business owners sometimes forget to split an employee’s pay into the correct wage or commission types, which defeats the purpose of tracking wage costs of multiple departments,” Williams explains.

“Many clients also encounter difficulty when they receive a garnishment notice or need to apply a health care deduction to an employee’s paycheck. Another problem can happen when a client forgets a payroll deadline and ends up scrambling to find a way to pay employees on time.”

A digitized process minimizes the risk of a problem. And if an issue does come up, it’s easier to run data queries than chase down paper checks. Across our finance operations, we are still a distance away from being 100% paperless, but the closer we get, the lower the risk of errors.

3. Strive for Automation

If you need to do something more than once in your business, you’re wasting time.

Payroll is a function that needs attention twice a month. Manual effort can easily become a cost-sink for your business. And chasing cost sinks will take time and resources from functions that are most in need of time and attention.

An early lesson that my co-founder and I have learned—from being hands-on with every facet of our business—is to automate redundancies off the bat, as quickly as possible. With our systems in place, we do very minimal data entry.

We focus our time on reviewing data, conducting consistent due diligence of our systems to ensure that no detail falls through the cracks, and managing our cash flow so that we can continue to evolve our company sustainably and systematically.

Automation of our payroll processes reduces manual labor, so we can focus on the areas of our business that need our attention.

Final Thoughts: Build Systems Sooner Rather Than Later

Our business, while still in its nascent stages, has shown early signals of growth. Having started with $0 in capital investment, with no plans to take on venture capital, we have created a path in which we have been able to align our passions and values with profitability and market needs.

We decided to invest sooner rather than later in establishing a payroll system, digitizing our processes, and automating everything.

As our operation scales, so will the simplicity. Why focus on creating, and subsequently fighting, unnecessary business fires?

There’s no reason to reinvent the payroll processing wheel. Simplify it off the bat.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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