Setting up a small business means tackling numerous challenges, but one of the most crucial is building your payroll department…

By Graham Mckanie

As a small business, it’s easy to put all your energy into delivering core services – at least until you find your feet – but it’s equally important that you set up a functioning internal administration, including an effective payroll department. Achieving strong payroll is a foundation for any successful business, but it’s especially necessary for small businesses, which need to control their resources closely and keep their employees satisfied.

So, if you’re working out how to set up payroll for a small business, read our list of steps, to give yourself the best possible start…

1) Payroll size: Before you create your payroll, you’ll need to understand what it needs to do –  will you need a payroll team with a range of skills, or will a single administrator do the job? The number of employees in your business, your industry sector, work hours, geographic location and many more factors will affect the size and shape of the payroll you build.

2) Pay frequency: The frequency of your pay-cycle will be an important decision. There isn’t really a formula to follow here – other than considering the cash flow needs of the other parts of your business. Depending on your legislative environment, your options include paying your employees weekly, fortnightly, monthly, or by calendar month.

3) Tax authority: To set your small business up as an employer, you’ll need to register with relevant domestic tax authorities, such as the IRS or HMRC. Registration is obviously a vital part of payroll compliance, but will allow you to sign-up for a range of administrative tools, like PAYE online.

4) Recruiting administrators: Once you’ve decided on the shape and size of your payroll, you’ll need to find the right employees to staff it. Bear in mind that your administrators will need to be more than just number-crunchers: modern payroll requires problem-solvers and creative thinkers, able to handle a spectrum of professional challenges.

5) Dates & deadlines: Learning how to manage payroll for small business means getting to grips with the most basic functions of the process – in other words, ensuring employees are paid, and tax is reported, on time. One of your payroll department’s first tasks should be to draw up a schedule for the tax year, and make sure important dates and deadlines have been marked.

6) Software tools: Your payroll employees will need the appropriate tools to do their jobs which means investing in, and training personnel to use, payroll software such as QuickBooks, Sage, or Xero. Most payroll departments incorporate some sort of software platform – but you’ll need to research which will be best-suited to the requirements of your set-up.

7) Skills & training: If you’re setting up a payroll system, it may not be possible to hire-in the relevant skills to handle the new administrative and compliance needs – in these cases you’ll need to provide suitable training to existing employees. Resources for beginner payroll administrators include official information provided by tax authorities, and training courses run by industry organisations such as the UK’s Chartered Institute of Payroll Professionals.

8) Compliance knowledge: Payroll processing is built on a constantly-shifting compliance landscape which administrators must navigate or risk financial penalties. When you’re setting up your payroll, make sure your employees have a way to keep up with regulatory changes – which means subscribing to industry literature and staying in contact with tax authorities.

9) Record-keeping: From logging personal information, to recording work hours and expense claims, successful payroll departments are built on inputting, analyzing and storing small details. To handle those details, you’ll need to integrate an effective, accessible record-keeping system, and ensure employees are comfortable using it.

10) Security measures: Payroll processing involves large amounts of personal data – including sensitive banking information – and you’ll need to put security measures in place to protect it. Practically, this means training employees in data-handling procedures and ensuring information is suitably protected online.

11) Communication: Payroll doesn’t exist in a vacuum – as you integrate your system, you’ll need to develop communication channels across every level of your organisation, and especially with HR and Accounting. Focus shouldn’t be restricted to email and messenger tools: payroll administrators will need to be trained to interact with other employees and brief senior management in person.

12) Overtime and expenses: Many small businesses need employees to work overtime hours, or pay for expenses as part of their work duties. This being the case, your payroll infrastructure needs to be set up to handle the added administration of these extra payments within PAYE, and without affecting the efficiency of the larger system.

13) Contingency plans: Payroll is a minefield of regulatory complexity – errors and obstacles are an inevitable part of the process. To deal with those challenges, and the associated delays they bring, you’ll need to build contingency plans into your payroll system to cope with unexpected events like software failure or missed client payments.

14) Scalability: Building a payroll department isn’t a ‘one-off’ – you’ll need to maintain and develop it as your business grows. To accommodate these professional changes, it’s important to create a payroll system which is flexible enough to scale up and down as your resources and needs change: be ready to hire new employees, or integrate new software tools to keep your pay process efficient and compliant.

15) Outsourcing: If you’re setting-up, and juggling resource management with delivering core services, it may be worth considering outsourcing some, or all, of your payroll administration to a third-party organisation. Outsourcing can be a useful payroll strategy, and is especially useful when your business starts to grow: larger, multinational organisations will use outsourcing as a cost-effective way to integrate ‘pre-packaged expertise’, and avoid compliance problems, as they expand into unfamiliar international locations.

With over twenty-five years of global mobility experience, including work with HMRC and the Royal Bank of Scotland, Graham Mckanie is currently head of activpayroll’s Global Mobility Division. An expert in delivering process, cost, and administration efficiencies, in his spare time, Graham can be found on the golf course.