Published on May 29th, 2023

If you own a small business, you wear many hats and take on various responsibilities to ensure the success of your venture.

When it comes to payroll, you may be tempted to handle it yourself to save costs and maintain control over the process.

However, managing payroll involves complex regulations and meticulous calculations that can be time-consuming and error-prone. 

In this blog post, we will explore the risks and considerations of doing your own payroll as a small business, and why outsourcing this task to a professional payroll service provider like Jahm Financial Services LLC may be the wiser choice.

Can You Do Your Own Payroll as a Small Business?

Managing payroll in-house may seem like a cost-effective option for small businesses. However, it's important to consider the complexities and potential pitfalls associated with handling payroll on your own.

While it is technically possible to handle payroll internally, it's crucial to recognize the time, effort, and expertise required to execute it effectively. Here are some key considerations to keep in mind:

• Time Commitment: Managing payroll involves various tasks, including calculating wages, withholding taxes, processing payments, and maintaining accurate records. These tasks can be time-consuming and may detract from other critical business operations.
• Knowledge and Expertise: Payroll processing requires a thorough understanding of tax regulations, employment laws, and compliance requirements. Staying up-to-date with these regulations and ensuring accurate calculations can be challenging without specialized accounting knowledge. 
• Complexity of Tax Filings: Small businesses must comply with various tax obligations, including payroll taxes and filings. Failing to meet these requirements accurately and on time can result in penalties and legal consequences.
• Changing Regulations: Tax laws and employment regulations are subject to frequent changes. Keeping track of these changes and ensuring ongoing compliance can be demanding for small business owners without dedicated resources.
• Potential Errors: Manual payroll processing is prone to human errors, such as miscalculations or data entry mistakes. These errors can result in incorrect payments, tax discrepancies, and dissatisfied employees.
• Data Security: Handling sensitive employee information, such as social security numbers and bank account details, raises concerns about data security and privacy. Protecting this information from unauthorized access or breaches requires implementing robust security measures.
• Payroll Software and Systems: Investing in payroll software can be expensive for small businesses. Additionally, understanding and effectively using payroll systems may require training and ongoing technical support.

Now that you understand all the responsibilities of doing payroll yourself, let's go through the major risks you should be aware of.

7 Major Payroll Risks You Should Be Aware Of

Handling payroll for your small business comes with inherent risks that can have significant consequences if not properly managed. In this section, we will highlight seven major payroll risks you should be aware of to protect your business and ensure smooth payroll operations.

1. Compliance with Employment Laws and Regulations

Keeping up with ever-changing employment laws and regulations can be challenging. Failure to comply with legal requirements such as minimum wage, overtime pay, tax withholdings, and employee classification can result in costly penalties and legal disputes. It is essential to stay updated on federal, state, and local regulations and ensure that your payroll processes adhere to them. Engaging the financial services of a professional payroll provider like Jahm Financial Services LLC can help ensure compliance and minimize the risk of non-compliance penalties.

Another aspect of compliance is accurately managing employee records, including employment contracts, tax forms, and other necessary documentation. Failing to maintain accurate and up-to-date employee records can lead to legal issues and can also impact the accuracy of payroll calculations.

2. Errors in Payroll Processing

Payroll processing involves complex calculations, including tax withholdings, benefits deductions, and overtime pay. Even a minor error in these calculations can lead to incorrect payments, resulting in dissatisfied employees and potential legal disputes. Mistakes in tax calculations can also lead to incorrect filings and penalties from tax authorities. It is crucial to have robust systems and processes in place to ensure accurate payroll processing. Investing in professional payroll services can help mitigate the risk of errors by leveraging their expertise and advanced software systems.

Additionally, errors in data entry or incomplete employee information can lead to discrepancies in paychecks, causing frustration among employees. Regularly auditing and double-checking payroll data can help identify and rectify any errors before they become larger issues.

3. Data Security and Privacy Breaches

Payroll data contains sensitive information, such as social security numbers, bank account details, and personal addresses. Mishandling or unauthorized access to this information can lead to serious data breaches and privacy violations. As a small business owner, it is your responsibility to ensure the security of employee data and protect it from cyber threats and internal breaches.

Implementing robust security measures, such as encrypted data transmission, secure servers, and access controls, can safeguard your payroll data. Regularly updating and patching software systems, using strong passwords, and conducting employee training on data security best practices are essential steps to mitigate the risk of data breaches. Engaging a professional payroll service provider that adheres to industry-standard security protocols can offer an additional layer of protection for your sensitive payroll data.

4. Non-Compliance with Payroll Taxes

Accurate and timely payment of payroll taxes is crucial to avoid penalties and legal consequences. Small businesses are responsible for withholding and remitting payroll taxes on behalf of their employees. Failure to comply with payroll tax obligations can result in severe consequences, including hefty fines and potential legal actions.

Staying up to date with payroll tax laws and regulations, including changes in tax rates and thresholds, is essential to ensure compliance. Professional payroll service providers have the knowledge and expertise to navigate the complexities of payroll taxes and can help ensure accurate calculations and timely filings. Partnering with a trusted payroll provider can provide peace of mind and mitigate the risk of non-compliance with payroll tax obligations.

5. Employee Misclassification

Misclassifying employees as independent contractors or vice versa can have serious legal and financial implications. Each classification comes with different tax obligations, benefit entitlements, and labor law requirements. Misclassification can lead to non-compliance with employment laws, such as minimum wage and overtime pay, and can result in legal disputes and financial penalties.

Understanding the criteria for proper employee classification is essential. It is advisable to consult with legal experts or engage professional payroll services to ensure compliance with employment laws and accurate employee classification. By correctly classifying your workforce, you can mitigate the risk of misclassification-related liabilities and maintain a positive relationship with your employees.

6. Recordkeeping and Document Retention

Maintaining accurate and organized payroll records is not only essential for compliance but also crucial for resolving any discrepancies or potential audits. Small businesses must retain payroll records, including pay stubs, tax forms, and timekeeping records, for a specified period as required by federal, state, and local regulations.

Failure to retain records for the designated period can result in penalties during audits and investigations. Implementing a systematic recordkeeping process and utilizing secure cloud-based storage can help streamline record management and ensure easy retrieval when needed. Professional payroll service providers often offer robust recordkeeping systems that can assist in maintaining accurate and accessible payroll records.

7. Payroll Continuity and Business Interruptions

Any disruption in payroll processing can have a detrimental impact on employee morale and your business's operations. Factors such as system failures, natural disasters, or unforeseen events can disrupt your payroll processes, leading to delayed payments and frustrated employees.

Having a comprehensive payroll continuity plan in place is crucial to mitigate the risk of business interruptions. This plan should include backup systems, disaster recovery measures, and contingency arrangements to ensure payroll operations can continue seamlessly, even in challenging circumstances. Partnering with a professional payroll service provider can offer added assurance in maintaining payroll continuity and avoiding disruptions.

Conclusion

While it may be tempting to handle payroll internally as a small business, the risks and complexities involved make payroll outsourcing a prudent choice. 

Jahm Financial Services LLC specializes in providing comprehensive accounting solutions, including bookkeeping, tax preparation services, and payroll management. By entrusting your payroll responsibilities to us, you can ensure compliance with payroll regulations, save time and costs, enhance data security, and foster employee satisfaction.

Contact Jahm Financial Services LLC today at (757) 263-0617 or [email protected] to discuss your small business's payroll needs. Our experienced team is ready to assist you and provide customized solutions tailored to your business requirements. 

Let us handle your payroll while you focus on growing your business and achieving your entrepreneurial goals.