Payroll for Startups – Common Mistakes to Avoid

The buzz of starting a new business is often quickly overshadowed by the grind of paperwork. And one of the biggest and most grinding administration tasks is the company payroll.

For startups, the payroll is one area where mistakes are often made. Unfortunately, it is also an area where mistakes can have some pretty dire consequences. Amongst other things, an incorrect payroll can cost you money, affect staff morale, and in serious cases, leave your business open to litigation.

For a startup to prosper, it needs to build on solid foundations. Part of these foundations should be an efficient payroll system that keeps your nose clean and your staff happy.

This post covers some of the most common payroll for startups mistakes, and more importantly – how to avoid them!

Payroll-manager

The most common payroll mistakes

As a startup business, you are going to make mistakes, and I speak from experience when I say – “been there, done that.” However, the most important word in the statement “The most common payroll mistakes” is – Common.

Even if you have made some payroll mistakes, you are not alone, and millions of successful businesses have made many of the mistakes listed below. The most important thing is to learn from your mistakes, or even better, you learn before you make the mistake.

In either case, the following list will help keep you heading in the right direction with your payroll:

Not calculating the pay properly

This is the most obvious and most common mistake. Calculating the correct pay is not just running a set of totals at the end of each month; it can be a proverbial minefield. Factors that you need to account for include:

  • Tax rates
  • NI contributions
  • Pension contributions
  • Notional pay
  • Holiday pay and entitlement
  • Sick pay
  • Maternity leave

And these are the straightforward ones, and most of them are affected by legislation that changes every time you think you have a handle on the situation.

The obvious answer is good software and technology to perform the calculations, but the software is still reliant on the correct information being input and to be always kept up to date.

It is in these latter areas where mistakes are commonly made. Having a grounding in the terminology and workings of the payroll system within your country is therefore essential to make sure you avoid “Garbage in – Garbage out”.

The other essential is to ensure you keep on top of updates. These will include the latest tax and other contribution updates. The mistake often made is to keep putting updates off; this can lead to employees being paid incorrectly and can bring with it the wrath of the taxman.

Record keeping

Keeping the right records and for the right amount of time is mandated by law. Startups often fall foul of this legislation simply through ignorance of the facts. The records that are required to be kept vary from country to country. So, it is essential to make yourself aware of the legislation that covers you.

For instance, in Ireland, employers are obliged to keep:

  • Employee Name and Address
  • PPSN Number
  • PAYE contributions
  • Pay Related Social Insurance (PRSI) contributions
  • Universal Social Charge (USC) deductions
  • Local Property Tax (LPT) deductions

These need to be kept for six years, and the onus is on the business to be compliant with the tax legislation.

On top of this, there is the need to comply with Data Protection legislation. How you store and share employee data is tightly legislated, and any breach of this can quickly get very messy.

In effect, what all this means is that simply backing up your payroll to a pen drive once a week is not going to work. Effective, secure, and safe data and record storage should be at the core of any payroll system.

Skimping on software costs

It is understandable when you are starting a business to try and cut costs. One area where I have frequently seen this happen is in the quality of the software package running the payroll. In one instance, which was only last year, I visited a company that still ran their payroll on a DOS-based package.

While this is an extreme example, the fact of the matter is there are payroll software packages that just don’t offer the full functionality to enable to run a businesses payroll quickly and correctly.

Many are designed for particular countries’ pay systems, then doctored to work in other countries. Whilst some of these are seamless and work perfectly in any country, with cheaper packages, shortcuts are often taken.

Making sure that you buy software from a reputable company that offers a software package that isn’t compromised by being badly modified and will be kept up to date to work with legislation changes is a critical step for a successful payroll.

Classifying employees wrongly

This is a growing problem in a jobs marketplace that now has a larger emphasis on freelancing, remote working, and the gig economy. Many startups will try to keep their payroll costs down by classifying workers as freelancers or subcontractors when in reality, the law classifies them as employees.

There are major differences between paying contractors and employees, which include: –

  • Pension contributions
  • Tax liability
  • National Insurance or Health care contributions
  • Sick pay and holiday leave

To avoid suddenly finding yourself liable to pay large sums in back taxes or unpaid employee benefits, it is essential that all your employees and contractors are classified correctly.

Paying employees from personal funds

One of the most common mistakes made by company founders is not separating their personal and business finances. This is a bad practice in any aspect of business finance, which obviously includes the company payroll.

There are two main root causes that can result in this happening:

  1. It is not uncommon for small businesses to start without setting up a business bank account. Setting up a business account for any size of business should be an essential first step; trying to separate business from personal at a later date will be a nightmare, and the longer it is left, the worse it will become. It is far easier to have a business account set up from day one and to ensure that all business expenses, including payroll, are from this account.
  2. The other common reason is simply a shortage of funds within the business. This is common with startups trying to build a business from scratch; startup expenses, cash flow problems, etc., can all wreak havoc with a fledgling business’s finances. However, the employees need to be paid, and very often, a knee-jerk reaction is to pay from out of pocket. If the funds cannot be raised through normal channels, then lend your business the money with a proper audit trail to keep the records straight.

Tips for a successful payroll

  1. Invest – It is understandable that new businesses want to keep costs down, but not investing in quality software and the necessary technology and physical infrastructure to keep your payroll accurate and your data safe is a false economy that can lead to a lot of pain in the future.
  2. Payroll Checklist – Keeping a checklist of every payroll associated task is a great way of keeping yourself organised; it can include items like:
    Dates for monthly and weekly payrolls
    Backup schedules and checks
    Software updates
  3. Training – Invest in some training for yourself or staff members to better understand the payroll process
  4. Outsource – An increasingly popular solution is simply to outsource your payroll to a third-party specialist. This ensures that you have a payroll specialist on your side to keep you always on the right side of the law.

Final thoughts

Payroll can be one of the most daunting tasks that a startup business has to deal with. Being prepared and forearmed with the proper information and tools can greatly ease the burden.

People starting a business for the first time have a vision, a dream for the future. Payroll worries can chip away at this dream, and ultimately if not dealt with properly, can sour the whole experience. By taking care to stay on top of this from day one, you can remain focused on the vision for your business.

Leave a Comment