Payroll for small businesses, our step by step guide

Payroll for Small Businesses

Your small business is growing, now, you have to ensure payment of your employees while adhering to all the rules and regulations relating to payroll and employment. Perhaps all this is intimidating to you, and you aren’t sure where to start. Read on for more on how to manage payroll for your small business.

What is payroll?

Payroll is a controlled process repeated at the end of each payroll period, and it is more than simply paying your new employee for the hours they worked. As the employer, you must issue a detailed pay slip to each employee that indicates their gross wages, salary, and bonuses, along with deductions like taxes. You are responsible for correctly calculating each employee’s taxes and exemptions and paying them over to the government according to a set schedule. This can be a daunting task, especially when you’re new to payroll, unfamiliar with regulations, and unsure where to start.

Challenges for small business owners

Small businesses face many challenges related to payroll that large, established companies may not. Firstly, you typically won’t have a professional accountant on staff. You would have to find the information yourself or hire a consultant to help you.

Then there’s all the paperwork. Keeping track of everything, filling out the correct forms and submitting them at the right time, and ensuring that everything is accurate is often a mammoth undertaking. Legislation often changes, so keeping abreast of that is important.

You will also need to make a decision about the systems or software you use to keep track of everything. You need something that’s flexible and efficient. If you keep track of everything in Excel, for example, accuracy becomes a potential challenge.  Mistakes can be costly, both financially and legally, so ensuring that all checks and balances are in place is essential.

Payroll options for small businesses

Fortunately, there are many options for small business owners. We recommend hiring a professional consultant to review your system to help you comply with the latest regulations. A consultant can also advise you on the most effective way to structure your payroll packages.

Overview of payroll process

The payroll process doesn’t have to be overly complicated. Here’s a brief guide to the main steps involved:

  1.       Register your company for Pay as you earn (PAYE). 

Employees’ Tax refers to the tax that is required to be deducted by an employer from an employee’s remuneration paid or payable. The process of deducting or withholding tax from remuneration as it is earned by an employee is commonly referred to as PAYE.

  1.       Gather employee information.

For tax purposes, you must collect a host of information from your employees based on their terms of employment. 

  1.       Choose a payroll period and set up payroll-related processes.

Will you pay your employees weekly, bi-weekly, or monthly? This decision depends on your circumstances and relevant regulations. The less frequently you pay your employees, the easier it is to manage payroll-related processes.

These processes include determining taxes, withholding, and other deductibles. It also involves reconciling time sheets if your employees are paid hourly wages.

  1.       Note payroll-related fees not paid by employees.

Legally, employees must contribute to the Unemployment Insurance Fund (UIF) on behalf of employees. Each employee’s paycheck should note this deduction, along with any other benefits. Potential benefits you could provide to your employees include medical aid contributions, car and fuel allowances, and cell phone allowance.

  1.       Submit bi-annual EMP501 reconciliation.

An EMP501 is the report of all your staff earnings, required by SARS. It needs to be submitted twice a year and must be submitted, employees need to be issued IRP5 certificates on a yearly bases. Before an EMP501 reconciliation can be submitted, tax numbers, addresses and bank details must be completed in full.
A successful EMP501 submission requires the following:

  • Monthly Employer Declarations (EMP201s) that you have already submitted
  • The payments you have made
  • Employee Tax Certificates [IRP5/IT3(a)s] you have generated

EMP501 reconciliations must be submitted twice during a financial year.
It is important to submit accurate reconciliations in order to avoid a SARS rejection.

Do you need support with this process? Contact us for more information on payroll accounting and other bookkeeping-related services.