Why is payroll important to small businesses?


Payroll is an important function for any small business that has employees. It is a complex function that has many aspects and comes with many regulations to follow. Small business owners usually have to do a lot of homework to understand the intricacies of payroll so they can do it right.

Fortunately, there are many online resources, such as humanresource.com, that offer helpful tips and guidelines

Here we’ll cover exactly why payroll is such an important process for small business owners to master.

Legal compliance and risk management

The laws governing payroll are numerous and include:

  • Fair Labor Standards Act (FLSA) – includes minimum wage and overtime requirements
  • Federal Insurance Contribution Acts (FICA) – Payroll taxes that fund Social Security and Medicare
  • Federal Unemployment Tax Act (FUTA) – Payroll tax that funds the unemployment insurance program
  • Equal Pay Act (EPA) – prohibits wage discrimination based on sex.

Employers must ensure that they comply with these regulations by paying wages and overtime and by withholding and paying the appropriate taxes. States also have their own salary laws that must be followed.

Accurately withholding taxes is difficult if you’re doing it manually, especially since you have to calculate withholding at the federal, state, and local levels. Each employee will have a different withholding structure based on their W-4.

Employers must also ensure that they make timely payroll and withholding tax payments according to federal, state and local deadlines.

Failure to comply with regulations may result in fines, penalties and interest. Violations of equal pay laws can be even more costly if employees feel discriminated against filing civil lawsuits.

Employee satisfaction and retention

Employees expect to be paid accurately and on time, and accurately. Payroll mistakes, more than anything else, can create employee dissatisfaction that may cause them to seek other opportunities.

Employee turnover is costly for small businesses, so proper payroll management is critical to maximizing employee retention.

Failure to pay proper wages and overtime can even lead to legal action by employees, meaning legal costs and bad publicity.

Keeping employees happy in terms of pay is an important part of your overall company culture, which should be one where all employees feel valued and treated well. A good company culture can be more important than wages in attracting and retaining employees.

Financial management

Many businesses fail due to poor financial management, and failing to manage payroll properly is often the culprit.

Payroll processing and administration comes with a cost that needs to be factored into the budget for businesses. Payroll costs can add up, so it’s important to include payroll in the overall financial management framework of a business.

Often, new business owners fail to plan for all payroll expenses, including payroll taxes, which can lead to cash flow problems. Cash is king for any small business, so payroll expenses should be part of your cash flow forecasting process.

Often, small business owners are experts in their field, but not in finance. Hiring a full-time professional to handle your financial management needs is expensive, but you can outsource the services of an accounting firm to help you. Some companies even offer outsourced chief financial officer services that can be cost-effective. An experienced CFO can help you develop a financial strategy that can significantly improve your bottom line.

Record keeping and data management

Maintaining payroll records is also important to comply with payroll laws and to be able to prepare employee tax forms correctly. Also, when problems arise, records must be easily accessible to resolve issues and provide documentation to relevant parties.

Payroll information is an important part of management decision making. You need to know the total cost of adding a new employee or the cost savings of removing an employee. How you staff your business should be an important part of your short- and long-term strategic planning.

It is also important to manage data security and privacy. The cost of a data breach to small businesses can be huge. Some estimate that the average cost of a data breach to a small business is around $150,000, which is a cost that most businesses cannot afford.

Outsourcing payroll services

Payroll is complicated! This is why most small businesses choose to use payroll software or hire a payroll service. Doing so certainly comes with a cost, but it can save you time that is better spent running and growing your business. A payroll service is much less expensive than hiring an employee to handle your payroll for you.

Using a payroll service can also ensure that you comply with all regulations. Some payroll services even offer additional HR services and tools that can help you manage your HR functions.

A payroll service can also ensure that your employee and payroll data is protected, which can give you great peace of mind, since data breaches can be so costly.

You’ll need to shop around to find a payroll service that offers flexibility and customization to meet your specific payroll needs and fits your budget. Payroll services vary widely in terms of the features they offer and the prices they charge, so be sure to do your homework to find the one that best suits your business needs.

You should also investigate customer reviews before choosing a payroll service. You want a service that offers good customer support and doesn’t have a history of errors The Better Business Bureau and TrustPilot are excellent places to find company ratings and reviews.


Payroll is a time-consuming and complex process and getting it right is critical to your business. The laws surrounding payroll and payroll taxes are numerous, and failure to comply can be costly. Learning how to pay payroll takes time that could be better spent on activities that can help you reach your business goals.

It is highly recommended that you engage with a payroll service so that you stay compliant and make better use of your precious and limited time. You will find that it is well worth the investment.

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