How to set up a payroll system for a small business

If you’ve found yourself asking the question ‘how to set up a payroll system for a small business’, you’re not alone. It’s a confusing world out there and it’s particularly daunting if you’re setting up a payroll system for the first time.

Payroll management isn’t the most glamorous part of running a small business. But it’s essential for the day-to-day running of your company. It goes beyond just paying your people – it ensures their compensation is accurate and fair. It also means compliance with tax laws, adhering to legal requirements and the correct calculation of salaries. Which, although unglamorous, leads to wonderful things. Done right, efficient payroll management saves time, reduces errors and keeps employee morale up.

There might be a lot of admin to wade through at first. But, once everything is set up, it should run like clockwork. That means you can focus your time and energy on the things that help your business grow.

Let us guide you through the essentials.

Basics of payroll management for small businesses

A payroll system is the process of calculating and distributing employee pay. This includes salaries, wages plus any bonuses or benefits. The main objectives of a payroll system are compliance, accuracy and efficiency. There are other important components too, like tracking hours worked, calculating deductions like National Insurance, and providing payslips.

Why do we use payroll systems? Because it streamlines the process. That in turn leads to efficiency gains. Automated payroll software is like a miracle worker for small businesses. It calculates everyone’s salaries, taxes and deductions automatically, requiring little manual effort. Magic.

Key Tools and Resources for Setting Up a Payroll System

• You need payroll software that matches your business needs. Keep your eyes fixed on features like employee data management, pay calculation, and automatic reporting to HMRC, saving you hassle in the long run. ADP’s solution is trusted by more than half a million small businesses.
• Tax submission and reporting tools will make sure you’re compliant and up-to-date with regulations, generating essential reports like P60s.
• You can make life easier for yourself and your employees by giving them access to their paychecks, tax forms and anything else they might need. Employee self-service portals are essential for transparency, and having everything in one place can reduce your admin workload.

Planning and preparation for setting up a payroll system

Think about your business needs. Take into account the number of employees, how often you pay them, and anything industry-specific (if you run an agency using contractors, you’ll have a very different staff set-up compared to a shop, for example). Dedicate time and resources to your payroll software, including staff training and continuous maintenance. The smoother it works, the more you’ll save in the long run.

Choosing the Right Payroll System for Your Small Business

There are some things to consider when shopping around for a payroll system.

• Scalability: Make sure the payroll system can handle your business growth.
• Compliance: Choose HMRC-recognised software to ensure total compliance.
• Integration: Think about compatibility with other essential systems like accounting or HR.

There’s a raft of payroll systems out there, from ADP to QuickBooks Payroll, Gusto and Square Payroll. With ADP you only pay for what you need, helping you keep your costs down.

Training and support for payroll system users

When your payroll system is set up, you should train your employees to use it properly. That looks different for everyone, but it’s good to be mindful of the following:

• Teaching staff how to use payroll software efficiently.
• Providing resources (how-to guides, videos) for ongoing development.
• Enabling easy access to employee self-service portals.
• Make sure the provider offers reliable customer support.

Real-World applications of payroll systems for small businesses

Boyles Turner, an SME based in Reading, turned to ADP to help with their payroll system. They struggled to deliver an accurate and reliable service and wanted a partner who felt like an extension of their in-house team.

Enter ADP’s payroll solutions it increased visibility, leaving more time to make sure data was accurate throughout the month. It’s led to greater consistency and visibility across the board.

Challenges in Setting Up a Payroll System for Small Businesses

At first, you might be tempted to use spreadsheets and basic office packages for payroll management. These might seem cost-effective, but as you scale up, they become time-consuming and complex to manage. Having one centralised, integrated system reduces errors and improves your overall efficiency.

It can also be a pain to keep track of new employment laws and regulations as they evolve. If you struggle to remain compliant, you could be penalised as a result.

Employee classification is a stumbling block for every industry. Determining how to classify employees properly can be a headache – and risky, too, with tough legislation like IR35. A solid payroll and payslip solution can perform employee classification for you, saving time and money.

Find out more about the main challenges businesses face when managing payroll in our useful article.

Importance of Payroll systems in small business operations

A happy, cohesive working environment is hampered when employees are paid late. Paying accurately and on time is one of the most valuable things you can do for your staff. It keeps company morale high and increases employee retention.

Data shows that 51% of employees in the UK would lose trust in their employer if they were not paid correctly just once. 35% said an incorrect payment would cause them to look for another job altogether.

A well-oiled payroll solution automates the process and reduces errors. The result? A motivated workforce, and a boost to your bottom line.

Integrating payroll with accounting provides accurate, up-to-date financial records. But payroll systems provide easy integration with every facet of your business, including HR and inventory. That means you can track customer relationship management (CRM) data with financial records (crucial for keeping happy clients and monitoring staff performance).

Legal and Compliance Considerations in Payroll Management

Like every aspect of running a business, there are legal pitfalls to be wary of. Certain laws regulate the employment relationship – and that includes data protection. Strict compliance is essential, and you’ll need to have a strategy on how to handle employee data securely and confidentially. Payroll software provides solutions such as encryption, restricted access and security audits, keeping you safe and compliant.

Future Trends in Payroll Systems for Small Businesses

AI is transforming the way we work, leading to new solutions for payroll systems. Smart analytics can offer cutting-edge insights into operations, helping companies make more informed decisions. We could see payroll systems provide personalised recommendations with real-time insights in the future. Plus, more integrations aligned with every aspect of business: from employee financial wellness to team productivity.

Whether you’re a fresh start-up or an established enterprise, paying staff on time and in an organised way is essential. Manual payroll processes come with huge risks – non-compliance, inefficiencies, and insecure data. The solution? Outsource your payment management to the experts. You’ll free up resources, helping you stay laser-focused on your business.

ADP has over 70 years’ of experience in payroll management, and our managed payroll and payslip solutions use cloud-based software to streamline the processes. We’re trusted to manage payment systems for more than half a million businesses.