Small Business Payroll Processing

[edit] Introduction

Payroll processing is the administration of paying employees accurately and on time while meeting the employer's legal, tax and record-keeping obligations. For a small business, the process generally involves maintaining employee records, recording working time, calculating gross pay, applying deductions, making payments, reporting payroll information to HM Revenue and Customs (HMRC), and maintaining appropriate records.

Although payroll can be relatively straightforward for a small workforce, errors can result in incorrect payments, additional administrative work, tax liabilities, penalties or disputes with employees. The complexity increases where employees work variable hours, receive different rates of pay, work across multiple projects or sites, or where contractors and subcontractors are also engaged.

[edit] What small business payroll processing involves

Payroll processing normally includes:

• maintaining employee and employment records;
• recording hours worked, overtime, leave and other relevant information;
• calculating gross pay, including salaries, hourly wages, bonuses and other payments;
• calculating and deducting income tax and National Insurance contributions where applicable;
• accounting for workplace pension contributions and other authorised deductions;
• making payments to employees;
• submitting required payroll information to HMRC;
• making payments of tax and National Insurance due to HMRC;
• providing employees with payslips and other required information; and
• maintaining payroll records for the required retention period.

Employers operating PAYE must normally submit information to HMRC through Real Time Information (RTI). A Full Payment Submission (FPS) is generally submitted on or before the date employees are paid, with an Employer Payment Summary (EPS) used in circumstances where additional information or adjustments need to be reported.

[edit] Why payroll processing matters

Payroll is both an administrative and compliance function. Employers are responsible for operating payroll correctly and meeting statutory requirements relating to pay, taxation, National Insurance, workplace pensions and employment rights.

Accurate payroll also provides employees with confidence that they will receive the correct amount at the agreed time. Errors in hours, pay rates, deductions or pension contributions can result in underpayments or overpayments and may require subsequent corrections.

For businesses involved in construction, payroll can be more complex because employees may work at different sites, undertake different types of work or be subject to different rates and allowances. Employers may also need to distinguish between employees, workers, self-employed subcontractors and other forms of engagement. The Construction Industry Scheme (CIS) can impose additional requirements where contractors make payments to qualifying subcontractors.

[edit] How small business payroll processing works

[edit] Establish the payroll system

Before employing staff, a business needs to establish the appropriate payroll arrangements. This includes registering as an employer with HMRC where required, establishing procedures for collecting employee information and selecting a method for calculating and recording payroll.

Payroll can be administered manually, through spreadsheets, using dedicated payroll software or through an external payroll service. The method chosen should provide sufficient controls to ensure that calculations, payments and statutory submissions are accurate and completed on time.

[edit] Establish employment status

The employment status of each person should be determined correctly because different rules apply to employees, workers, self-employed individuals and contractors. Treating an employee as self-employed does not change their status if the actual working arrangements indicate an employment relationship.

Employment status can affect PAYE, National Insurance, workplace pension obligations and employment rights. Particular care may be required where individuals provide services through intermediaries or personal service companies, as the off-payroll working rules may apply in some circumstances.

[edit] Record working time and pay information

Payroll calculations should be based on accurate and appropriately authorised information. For hourly paid employees, this normally includes hours worked, overtime, absences and relevant leave. Salaried employees may require fewer calculations, although changes to salary, working patterns, leave, bonuses or other payments still need to be recorded.

Businesses operating across several sites may also allocate labour costs to individual projects or cost centres. This can allow payroll information to contribute to project accounting and job costing.

[edit] Calculate gross pay and deductions

Gross pay is calculated from the employee's contractual pay and any additional payments due for the relevant pay period. Depending on the employment arrangements, this may include salary, hourly pay, overtime, bonuses, commission, allowances or statutory payments.

Deductions may include income tax under PAYE, employee National Insurance contributions, workplace pension contributions, student loan deductions, attachment of earnings orders and other deductions authorised or required by law.

The employer must also account for employer National Insurance contributions and any other employer liabilities associated with employment.

[edit] Make payments and provide payslips

Employees should be paid according to the contractual pay arrangement. Common payment frequencies include weekly, fortnightly, four-weekly and monthly, although the appropriate arrangement depends on the business and employment contracts.

Employers must provide employees with an itemised payslip showing the information required by law. Payroll records should also enable the employer to reconcile the total amount paid to employees with the corresponding accounting and bank records.

[edit] Submit payroll information and make payments

Employers operating PAYE generally report employees' pay and deductions to HMRC through RTI. The information submitted must correspond with the payroll actually operated for the relevant pay period.

Amounts due to HMRC, including PAYE income tax and National Insurance contributions, must be paid by the applicable deadlines. Employers should maintain a clear record of payroll submissions, payments and any corrections made after a payroll has been processed.

Construction businesses may have additional obligations under the CIS when making payments to subcontractors. CIS deductions are separate from the PAYE deductions applied to employees and should not be used as a substitute for correctly determining employment status.

[edit] Payroll software and administration

Manual payroll can be appropriate for a very small workforce, particularly where pay arrangements are simple. As the number of employees or the complexity of pay arrangements increases, however, manual calculations can become difficult to control.

Payroll software can automate calculations, produce payslips, maintain employee records and support statutory reporting. When selecting a payroll system, businesses should consider:

Using software does not remove the employer's responsibility for ensuring that the underlying employee information and payroll calculations are correct.

[edit] Payroll and accounting

Payroll is a significant business expense and should be reconciled with the accounting records. Payroll journals can be used to record gross wages, employer National Insurance, pension costs and other employment-related expenses, together with the amounts deducted from employees.

For businesses carrying out construction work, allocating labour costs to individual projects can help with budgeting, cost control and assessment of project profitability. Accurate allocation requires reliable time records and consistent use of project or cost codes.

Payroll records should also be reconciled with payments made from the business bank account and with amounts reported to HMRC. Regular reconciliation can identify errors before they accumulate.

[edit] Common payroll mistakes

Common problems in small business payroll include:

• failing to register correctly as an employer;
• incorrect employment-status decisions;
• inaccurate recording of hours or overtime;
• applying an incorrect tax code;
• failing to account correctly for National Insurance contributions;
• incorrect workplace pension deductions or employer contributions;
• failing to submit RTI information on time;
• failing to pay amounts due to HMRC by the applicable deadline;
• making unauthorised deductions from wages;
• failing to maintain adequate payroll records;
• failing to make required CIS deductions from subcontractor payments; and
• relying on manual processes without adequate checking and reconciliation.

Payroll should normally be subject to appropriate internal checks. For a small business, this may involve reviewing payroll reports before payment, checking unusual variations from the previous pay period and reconciling payroll with bank and accounting records.

[edit] Construction-specific considerations

Construction businesses may need to manage payroll alongside the particular requirements of project-based work. Employees can work on several projects or sites during a pay period, requiring accurate allocation of hours and labour costs.

The distinction between employees and self-employed subcontractors is particularly important. Employees are normally paid through PAYE, while qualifying subcontractors may fall within CIS. The fact that an individual works on a construction site or describes themselves as self-employed does not, by itself, determine their employment or tax status.

Where contractors or workers are engaged through intermediaries, the applicable off-payroll working rules should also be considered. Businesses should establish the relevant status and reporting obligations before payments are made.

[edit] Frequently asked questions

[edit] How often should a small business run payroll?

There is no single payroll frequency that applies to all businesses. Employers may operate weekly, fortnightly, four-weekly or monthly payrolls, depending on their contractual arrangements and operational requirements. The chosen pay frequency should be applied consistently and reflected in employees' contracts and payroll records.

[edit] Can a small business process payroll manually?

Yes. A small business can process payroll without dedicated payroll software, provided it can accurately calculate pay and deductions, maintain the required records, make payments and meet its reporting and payment obligations. Manual processing becomes more difficult to control as the number of employees or the complexity of pay arrangements increases.

[edit] What payroll records should a small business keep?

Payroll records generally need to include information such as employee details, pay and deduction information, hours worked where relevant, payments made, tax and National Insurance calculations, payroll submissions and pension information. Employers must retain records for the periods required by the relevant legislation and regulatory requirements.

[edit] Is payroll software necessary for a small business?

Payroll software is not necessarily required, but it can reduce the amount of manual calculation and help with record keeping and statutory reporting. The suitability of manual processing or software depends on the number of employees, the complexity of their pay arrangements and the resources available to the business.

[edit] Conclusion

Small business payroll processing combines the calculation and payment of wages with a range of tax, employment and record-keeping obligations. A robust payroll process should begin with accurate employment-status and employee records, followed by reliable time and pay information, correct deductions, timely payments and appropriate statutory reporting.

For construction businesses, additional considerations can include project-based labour allocation, the Construction Industry Scheme and employment-status issues involving subcontractors and intermediaries. Whether payroll is managed internally, through software or by an external service, the employer remains responsible for ensuring that the payroll arrangements comply with applicable requirements.

[edit] Related articles on Designing Buildings

• Pay as you earn in construction PAYE
• Payroll companies
• Construction industry scheme CIS
• Employees in the construction industry
• Employment Law
• IR35
• Personal service company
• Accounting
• Accruals
• What Are the Four Types of Payroll?