By Xero

A smooth­ running payroll system is vital to the success of any small business. Staff payment problems can lead to low morale, poor productivity and perhaps even a government audit.

While payroll responsibilities can seem daunting when you first start out, with a little care and planning you can avoid the common mistakes.

Use cloud­ based software

Using online accounting and payroll software to store financial data is a sure fire way to reduce any potential payroll risks. With cloud­ based software, your information lives online and not on your hard drive. Cloud accounting software also enables you to invite unlimited users to your organisation. This means you don’t need to rely on one person for pay day and you’ll be able to train several of your staff to handle the payroll. You can also choose the access level of employees to ensure that no one accesses data they shouldn’t be.

Tick the legal boxes

Payroll is covered by tax law, which is complex and the penalties of errors can be high. Even the cost of an audit can bankrupt a business. Stay on the right side of the law through accurate payroll accounting. Some accounting software has payroll built in or as an add on, which makes it easier to meet the accuracy level needed.

Who really works for you?

Not everyone who works on your premises is considered an employee under some laws. If you have contractors or freelance workers you’ll need to check the rules carefully.

Choose your payroll software carefully

Payroll issues are common, and these are often due to software that hasn’t been tested or built well, or simply doesn’t suit a particular organisation. Before choosing a payroll system, read feedback from users and test it thoroughly before switching.

Involve your staff in payroll decisions

Regular, timely payment is vitally important to your staff. Small businesses may be flexible enough to accommodate their employees’ payroll requests. For example, some companies choose to pay fortnightly, rather than monthly. Even changing the monthly payment date could make all the difference to your employees. Involving staff in these decisions will make them feel more valued.

Understand payroll tax codes

Tax codes can change for many reasons, including salary, benefits, bonuses, student loans, past employment and seniority. Get them wrong and you’ll have some costly recalculations to carry out, not to mention embarrassing explanations to HMRC. If in doubt, seek advice from a government tax advisor.

Handle errors with common sense and compassion

Mistakes happen. If you notice an over or underpayment, discuss it with the staff member concerned before you take action. If you take an overpayment all back in one go, it could bankrupt your employee. And even if it doesn’t, it’s unlikely to improve their morale. Take back smaller amounts stretched over several months – it’s likely to work out better for them and your business.