SMB payroll pitfalls: 8 mistakes companies should avoid

Paying employees sounds straightforward, but it is not unusual for small and medium businesses (SMBs) to make mistakes in managing their payroll. These errors can have serious consequences, ranging from damaging employee morale to fraud losses, and tax penalties for late or incorrect tax payments and submissions.

Tax regulations are constantly changing, the rules are complex and technical, and there is a lot of data to process and manage. As such, it is easy for things to go wrong when a business doesn’t have robust processes and systems in place.

Here are some of the biggest mistakes we see SMBs make in processing their payrolls.

1. Overpaying or underpaying employees by mistake
Paying employees, the incorrect amount of remuneration can cause serious headaches for your business. Underpaying employees can affect staff morale and cause people distress, while overpaying is a financial risk to the business. Even small discrepancies can turn monthly reconciliations and annual audits into a headache.

Some reasons that these errors can creep in include:
• Using the incorrect tax codes;
• Failing to accurately track an employee’s overtime, commissions, bonuses, unpaid leave or leave pay;
• Errors in processing expense claims, travel allowances and other disbursements; and
• Mistakes in data capture.

Solution: Businesses should consider implementing a robust payroll system that automates most of these processes. This system should be able to accurately calculate pay based on various factors such as hours worked, commissions, bonuses and leave. It should also correctly apply tax codes and handle expense claims and allowances.

2. Not planning for public holidays
Public holidays can throw a spanner in the works in numerous ways. Failing to account for public holidays may result in not paying employees the correct hourly wages for working on these days. Another potential issue is that employees might only be paid the next working day if the normal day of the payroll run falls on a public holiday.

Solution: SMBs HR and payroll leaders should thus mark off public holidays on their calendars to ensure that employees are paid by the day of the month they usually get their money.

3. Picking the incorrect payroll schedule
Since labour is one of the biggest expenses for the average SMB, they will want to ensure they have cash in the bank when doing the payroll run.

Solution: It is wise to align weekly, fortnightly, or monthly wage and salary payments with cash flows into the business to avoid relying on the overdraft facility.

4. Failing to process the payroll on time
Delayed payroll processing can lead to disgruntled employees and potential legal consequences.

Solution: Establishing a strict payroll processing timeline, complete with reminders and backup plans, will help business owners ensure timely and accurate payments. It is also vital to meet the deadlines for submitting EMP501 interim and annual reconciliations to SARS to avoid fines and penalties.

5. Incorrect gross and net calculations
Incorrectly calculating gross and net remuneration can result in discrepancies in tax deductions. This can lead to problems with SARS.

Solution: Regularly reviewing and reconciling payroll data helps ensure compliance with tax regulations.

6. Not maintaining payroll records
According to South Africa’s Basic Conditions of Employment Act, companies must keep the following records for at least five years: employment contracts, time sheets, pay slips, SARs and UIF submissions. SARS also requires businesses to keep financial records for a minimum of five years.

Solution: SMBs should keep accurate payroll records for tax reporting, audits, and resolving disputes.

7. Not staying up to date with payroll legislation and regulations
South Africa’s tax laws and regulations are in constant flux, with the finance minister and Treasury announcing new tax rules and tables in the budget each February. SMBs must ensure they comply with the latest labour laws and tax regulations to stay on the right side of SARS and the Department of Labour.

Solution: Attending payroll seminars, watching webinars, and attending industry conferences can help enhance your knowledge and keep you up to speed with the latest changes. The SARS website is another valuable resource that can help people stay abreast.

8. Incorrectly identifying employees or contractors
Under South Africa’s tax and labour laws, independent contractors are treated differently from employees. True independent employees who invoice the business services rendered or goods supplied should not be added to the payroll. There are several complex tests of whether a worker is an employee or a contractor, but South Africa’s laws will regard a colleague as an employee if:
• They provide their services at the premises of the person by whom they are paid, and
• They are subject to the control or supervision of a company representative regarding how they perform their duties.

The same employee may be regarded as an employee for tax purposes but not under labour law. If a contractor is an employee for PAYE purposes and is paid remuneration, the company will need to withhold PAYE and contribute to the Skills Development Levy, but not UIF. If SARS determines that an SMB should have withheld these taxes for a worker, it will claim the money from the employer.

Automation can eliminate most of these errors
Across all the above errors listed, the easiest way for an SMB to reduce and avoid these errors is to put an automated payroll solution in place. The software will accurately calculate employees’ salaries and deductions, compile tax submissions, and record employee information and transactional data in a single place. A good payroll solution will also be automatically updated with the latest laws and regulations.

Today, SMBs can find affordable cloud-based payroll solutions that are 100% compliant with South African tax legislation and regulations. Not only does automating help SMB owners get the basics of payroll right with minimal effort, but it also frees them from paperwork and gives them more time to spend on growing the business.

About Sage
Sage exists to knock down barriers so everyone can thrive, starting with the millions of small and mid-sized businesses served by us, our partners, and accountants. Customers trust our finance, HR, and payroll software to make work and money flow. By digitising business processes and relationships with customers, suppliers, employees, banks and governments, the Sage Network connects SMBs, removing friction and delivering insights. Knocking down barriers also means we use our time, technology, and experience to tackle digital inequality, economic inequality, and the climate crisis.