How to Pay Employees in a Small Business | Best Guide for Owners

Paying employees regularly makes you handle business for a long time of period. But it sounds somewhat tedious. Therefore, you have to implement a successful payroll program.

As a small business owner, there is a lot to know while paying your employees. Therefore, “founderactivity.com” is offering you the ultimate guide to how to pay employees in a small business and other linked sources.

When you are willing to start a new business it is not only to consider the office set up or the staff training.

You have to pay your attention to the payments of your employees. Not only that in a business or a company you are also paid too.

However, you need to create a payroll process for your small business. Therefore in this guide, you will go through the following criteria.

• Key rules to pay employees
• Ways to pay the employees in a small business
• Payroll methods are available to the small businesses
• Options to pay employees when starting a small business
• Employment agreements you need to consider when establishing your payroll system
• How to set up a payment method for your small business
• Method of small business owners paying themselves

Key rules to pay employees

Before starting a payroll process you have to go through the rules to pay the employees. In your small business, there may be a small team. But it is most applicable to make the rules take in place. Whether it is a small business or not you have to outline the key rules to pay the employees.Before starting a payroll process you have to go through the rules to pay the employees. In your small business, there may be a small team. But it is most applicable to make the rules take in place. Whether it is a small business or not you have to outline the key rules to pay the employees.

Before starting a payroll process you have to go through the rules to pay the employees. In your small business, there may be a small team. But it is most applicable to make the rules take in place. Whether it is a small business or not you have to outline the key rules to pay the employees.

Before starting a payroll process you have to go through the rules to pay the employees. In your small business, there may be a small team. But it is most applicable to make the rules take in place. Whether it is a small business or not you have to outline the key rules to pay the employees.

• Decide how much you want to pay your employees
• Classify your employees correctly
• Gather the correct employee information and forms
• Determine the frequency of pay
• Keep accurate payroll records
• Stick to job standards
• Find out the paychecks and then you can avoid them
• Choose the right payroll processing option for your business

1. Decide how much you pay your employees

Deciding how much you want to pay your employee is the first thing you have to do as a small business owner. Apart from paying each employee a fair amount you have to pay attention to the business needs and the wage obligations.

Therefore, to decide what to pay for your employee, decide the worth of the employee. And also expecting compensation for them. Not only that you must consider the merit increases, bonuses, commissions, and any other form of payment.

2. Classify your employees correctly

A person’s employment status directly affects what the employer needs to keep with the salary. Therefore, you have to classify your employees correctly.

And also make sure to consider that the employee’s earnings are subjected to deduct from employment insurance premiums and pension plans.

Therefore, if you miscalculate your employees as the contractors and you neglect to make the applicable deductions you will need to pay significant taxes, interest, and legal fees in addition to the deductions.

3. Gather the correct employee information and forms

While the employee starts to work in your small business or the company you have to collect accurate employee information. One of the important information you have to gather is the Social Insurance Number (SIN).

And also you have to determine whether you are using the same details in the SIN. And also new employees must compile a TD1, Personal Tax Credits Return Form within seven days since they start their works.

Not only that if the employee failed to compile the new forums he will penalize $25 for each late day. However, the minimum penalty is $100 and the maximum is $2500.

4. Determine the frequency of pay

Then you have to determine how often to pay your employees. Most of the small businesses choose a two-week payroll frequency. However, the frequency of pay depends on your business needs. Some of the needs are cash flow cycles. Apart from the two-week payroll frequency, you can use the other options such as weekly, semi-monthly, or monthly payroll frequency.

5. Keep accurate payroll records

Keeping employee records on a date is an essential legal responsibility of a small business owner. It might be a form of a human resource and salary record of an employee. Therefore, you should keep a record of employees’ pay rates and the number of hours worked. And also you must keep a record of all payments made, including overtime pay, holiday pay, and vacation pay. At the end of the year, it is essential to keep records and issue employment records to assist in tax filing. However, it recommends that employers keep a centralized human resource system to facilitate access to all employee records.

6. Stick to job standards

While you are compiling a payroll method for your small business, you have to pay your attention to the provincial employment laws. This might be complex if you hire more number of employees. Therefore, you have to consider the holiday pay entitlements, leave laws, overtime rules, and more of the other provincial laws. However, it is better to select a payroll method with less or minimum policies and the rules. Not only that a job standard generally set a minimum of:

• Working hours and leisure
• Payment statements and payment frequency
• Minimum Wage and Overtime
• Vacation pay and vacation pay

7. Find out the paychecks and then you can avoid them

Most of the small business may penalize for the inaccurate clarification or tax deductions, delayed or non-payment of remittances, incorrect filing of an information report and incorrect payment method. According to the Canada Revenue Agency, if a remittance delay by one day, the penalty starts at 3% and can be increased to 10% if the payment is delayed for more than seven days.

8. Choose the right payment method for your small business

Selecting the right payment method for small business employees is crucial to handle payrolls correctly and efficiently. There are several different approaches to consider when deciding on a payroll solution. The first option is to set up payments internally by a trained professional manually or using payroll software.

Another option is to outsource the payroll to a trusted partner to facilitate final processing. As an SMB owner, it is very important to get the basics of payroll right so you can free up time to focus on growing your business.

Ways to pay the employees in a small business

Once you have identified the key rules to pay the employees, then you have to decide the best way to pay them. Through different ways to pay employees, you should select the best one for your small business.

• Wages
• Bonuses
• Commissions
• Insurances
• Stock options

1. Wages

Wages are the amount of salary or compensation you pay employees. And also it is a fixed regular payment makes in daily or weekly depending on your small business pay schedule. According to the FLSA (Fair Labour Standards Act).You must pay employees the federal or state minimum wage.

2. Bonuses

Bonus is extra money given to the employees. On the other hand, it is the money awarded to the employee more than the salary or the average salary. As a small business owner, you can distribute the bonuses based on the performance or randomly. Followings are the types of bonuses that a company or a small business offer to an employee.

• Annual bonuses
• Signing bonuses
• Spot bonuses
• Retention bonuses
• Holiday bonuses
• Referral bonuses

3. Commissions

Commissions offer a lower fixed rate. Because the amount you are going to pay on an employee decides based on the work that performs by him. And also a commission has given addition to the salary. Not only that it depends on a specific number of orders or percentage of sales.

4. Insurances

Good insurance might compensate for a lower salary. Therefore, as a small business owner, you can help your employees by paying their insurances. There are mainly two ways of paying insurances.

1. A tax stipend arrangement
2. A tax-free reimbursement arrangement

A tax stipend arrangement

Tax stipend arrangement is a kind of tax deduction when the employees receive the money they purchase health insurance from the employer. Therefore, the employer’s monthly contribution added to the worker’s wages. At the end of the year, employees must fill out a form indicating the amount of their allowance, which should be classified as income based on their personal income tax benefits.

A tax-free reimbursement arrangement

Tax-free reimbursement insurance arrangement is a fixed amount that pays to the employer to employees for repaying themselves for the health insurance and medical bills. Therefore, the employees are paid after qualifying expenses.

5. Stock Options

Stock options are not just for advisors or investors. Therefore, through a contract, your small business can provide this opportunity to employees and contractors. And also your staff can buy shares of the company at a premium price, which is a fixed cost.

Payroll methods are available to the small businesses

How you pay your staff as well as how much you pay them is important. And also it is beneficial to know your options as some methods may be easier for your staff than other methods. Not only that, most of the small business owners are in tedious problems like, how much should I pay my employees and how do I pay an employee. Followings are the payroll methods available to you as a small business owner.

• Direct deposit
• Paychecks
• Cash
• Payroll cards

1. Direct Deposits

In the process of direct deposit, You can transfer funds from your business bank account to employee bank account. Direct deposit refers to the Automated Clearing House transaction (ACH). And also it is a safe and inexpensive method for paying your employees in a small business. You can pay employees online through this method.

2. Paychecks

Paychecks are the most popular employee payment method in small business. Though some say that paychecks are an outdated method for paying the employees, it is also a payroll method that uses in small business. It is a kind of printed check that is sent in weekly, biweekly or monthly. Paychecks are given according to the contract with the employees.

Pros

• Employees do not need to have a bank account
• Secure the banking information

Cons

• Paychecks can get lost or stolen
• Consume time

3. Cash

You can pay your employees using the money of your wallet. There are no paper works and digital trails. But make sure, to careful in keeping records. And also paying in cash moves you into a risk than the other payment methods.

4. Payroll Cards

A payment card is similar to the debit cards. It is a prepaid card that is used to pay the employees in a small business. The pay card is loaded with the wages for that pay period.

Options to pay employees when starting a small business

There are many options that small business owners can follow to compensate workers who do not run out of cash. Therefore, consider the following options to save money when hiring employees to make your business state.

1. Offer a competitive stock options

When you can not afford a large salary, it is common practice to pay employees with competitive stock options to attract the best employees with talent. However, if you hire people with trust and better understand the company mission, they might willing to accept shares at market rate wages.

Offering s stock options is a motivation tool that you can use to attract the employees. The benefits of working hard with shares motivate employees to invest more of their time and energy into the company.

Giving shares can attract the best employees. When starting a small business, you should hire the employees who be the high-risk people who really think your company has real value. If they are willing to accept stock options apart from the big pay, they will be the hard workers you need at the beginning of your small business. If they do not want to buy shares, they are not suitable for the early stages of your company anyway.

2. Hire Interns

You might be a more concerned person while paying your employees. When starting a small business there will be some tedious things may happen in paying the employees. However, there are many talented students who work hard who want to work without any payment as long as they have valuable working experience. Therefore, contact the local colleges and universities to find the interns who are willing to have some experiences in your small business.

3. Hire Contractors or Part-Timers

Hiring independent contractors is another way to save your money in small business until you make your business off the ground. Part-timers are particularly stay-at-home parents who are looking for a part-time job. You can pay them less than half of the money you pay for full-time workers.

4. Defer compensations

Another way to save money when starting a small business is to postpone payments to employees until the target and agreed milestones are reached. However, this can be a cash bonus or a refund and will not be distributed until the company has earned some income or profit. Therefore, you can link employee payouts and specific performance achievements to motivate employees.

Employment agreements you need to consider when establishing your payroll system

An employee agreement will help you to avoid the payment misunderstandings. And also your business may consider them valuable in formalizing employee terms. Such as,

• Work hours and job duties
• Salary, hourly wage, or commission
• Employee benefits
• probationary period

Union Agreement

If your employees are members of the union committee, they might have a collective agreement that includes additional employment standards. Therefore, in most cases, union workers will be asked to deduct a portion of their wages and repay the arrears to a third party.

Averaging Agreement

In some businesses, the employer and the employee sign a general contract that allows them to calculate the average number of hours worked in one, two, three or four weeks. This eliminates the need to calculate the number of hours covered by the agreement and pay overtime allowances when you prepare the payroll.

Employee Benefit Agreement

According to the CRA, Canada Revenue Agency, employee benefits include the personal nature of what you pay or give to an employee or their family. Therefore, benefits may include, reimbursements, allowances or the use of goods, services, or property belonging to your business.

Employee benefits

• Mobile phones
• Meals
• Company vehicles, immigration passports, or parking permits
• Childcare costs
• Group insurance premiums
• Fun membership

How to set up a payment method for your small business

After you know how to pay your employees and how much you want to pay your employees, then you have to implement a payroll system for your small business. Followings are the steps that you must take.

• Set up an employer identification number (EIN). This EIN number allows you to file your business’ taxes and a business bank account.
• Advice the employees to complete their payroll report forms
• When setting your payment deadlines, sync them with tax deductions for IRS.
• Keep a compensation plan for vacations, sick time and vacations
• Decide whether the payment will be made in-house or outsourced to a payment service
• Ask a certified public accountant or visit IRS.gov to familiarize yourself with the due dates, documents you need to keep and for how long. Make sure you are aware of the payroll tax periods that you report on time. Stay above the tax laws of your state to ensure you comply.

Method of small business owners paying themselves

Once you pay your employees you have to pay your self also. Therefore, you have to implement the step of paying yourself in your payment system. You can pay your self by paying yourself a salary or by taking an owner’s draw.

Salary

Most of the business owners pay themselves by a salary because the tax withholding and benefit payments are automatically deducted from the salary. Therefore, the salary is more suitable for S and C corporations.

S corporations

S corporations are similar to the sole proprietorships or partnerships and the tax liability that is connected to the members or the shareholders. And also it is determined by the percentage of the ownership. Therefore, if you have an ownership in the S-corp you have to pay your self according to the tasks perform by you. Not only that you will be able to have the profits.

C corporations

If you have ownership in a C corporation business, you can make a salary or the distribution. As with the S-cope, if you are engaged heavily in the c-cope, you will treat as an employee. Therefore, you need to pay yourself a salary.

Draw

Owners take money from the company for their own personal use. So it calls as a draw. Therefore, the sole proprietorship and the partnership owners considered as self-employed individuals. So they are not paid as the regular wages. a draw is mostly applicable for the sole proprietors, partnerships and the limited liability companies.

Sole proprietorship

Individual owners are organized with the LLC. All the Profits of the business are considered as the income of the owner. Anyway, an individual owner cannot deduct payments from his company as the business expenses. They get paychecks from earnings through draws.

Partnership

If you have a partnership, you can get money from distribution. But here the partners are not paid a salary. They only have a portion of the profits. And also partners have to pay the taxes on the total profits of the shared business according to the agreement.

Thank you all for reading. However, you won’t be crucial while paying your employees with this ultimate guide on how to pay your employees in a small business. You can join our Facebook community and share your thoughts and experiences. As well as if there is anything to discuss, the comment section is open for you.