How to Pay Employees Guide

Share Post:

Employees are the heartbeat of every successful business. Their hard work, dedication and passion for serving the business’s interests are the lifeline for its success. The least you can do for your employees is ensure they are paid fairly for their work and on time. It seems like an easy task that many businesses should find no problems completing, but many struggle, and rightfully so.

Paying employees is one of the most precarious undertakings of any business. Ensuring you pay the right person the right pay can be confusing, especially when you have employees running into the dozens, hundreds or even thousands.

If you have found yourself in the same problem and can’t fully figure out how to keep up with your employee payments or keep having complaints at HR for incorrect pay, this guide should help you develop a better payment system and understand how to pay employees better to keep them happy and ensure you maintain them in the business.

How to Pay Your Employees

How you pay employees depends largely on the systems and processes you have in place. Most businesses have decided to use a payroll process, which significantly eases the process. However, there are still several processes you need to go through to pay your employees properly and successfully.

Understand the labour law

Paying employees is, by law, a mandatory responsibility of all business owners in the UK. The worker pay is regulated, and there are specific rules for how you should pay employees based on their different classifications.

One of the labour laws you should be aware of is the National Minimum Wage Act 1998, which sets out the national minimum wage for employees and employers across the use. This wage is regularly reviewed by the government to keep it in line with inflation and other current factors.

If you have part-time workers on your payroll, you should also familiarise yourself with the Part-Time Workers Regulations 2000, The Equality Act 2010 and the Agency Workers Regulations 2010.

Of course, there are other regulations about employees but not necessarily their income, such as;

  • Employment Rights Act 1996 – Is an update to older Labour Law. It covers the rights of employees in situations such as dismissal, unfair dismissal, paternity leave, redundancy and maternity leave.
  • Employment Relations Act 1999 – Establishes rights at work for trade union recognition, derecognition and industrial actions.
  • Maternity and Parental Leave, etc. Regulation 1999 – Statutory legislation that governs the rights of employees to time off work for maternal and paternal responsibilities.
  • Transfer of Undertakings/Protection of Employment Regulations 2006 – Protects existing employees’ rights and any employment contracts or promises when a company goes through a business transfer.

Not all these laws directly impact employee pay, but they touch on the welfare of the employees, and every business knows that a happy workforce directly impacts the business’s success.

Decide Your Payroll Method

After updating yourself on all the labour laws that apply to your business and employees, you can find the right payroll method.

Different payroll options are available in the market, and finding the one that best fits your needs won’t be hard. However, there are several factors you should consider when choosing the payroll system, such as how many employees you have and how much you can afford to invest in the payroll system.

The four most common payroll operation methods are in-house manual payroll, outsourced payroll, automated payroll systems, and bookkeeper-managed payroll. Each system has benefits and downsides you must consider for the best results. For example, an in-house payroll can be cost-effective for small businesses with few employees. But it becomes less favourable as the business grows and adds more employees. It becomes obsolete when you expand internationally.

Businesses with many employees might find an outsourced payroll service. This particularly benefits companies with international employees who need global payroll solutions. It allows you to focus on running your business without managing the complexities of international payroll.

When looking for a payroll system, you should consider one with the following features to ensure a smooth collection of data for accurate payment of the employees;

  • Accurate time and attendance tracking – With this feature, you can automate the process of tracking employees’ working hours, reducing the risk of errors associated with manual data entry. Accurate time tracking is vital for businesses with hourly employees, and accurate collection of the working hours will directly impact the employee’s pay. This feature also provides other valuable data for workforce management that can help you better understand your staffing needs and employee utilisation.
  • Automatic breaks and overtime – This feature is also vital for companies with hourly employees. It automatically calculates break times and overtime hours according to the rules set in the software. It saves time and ensures compliance with labour laws regarding break times and overtime pay. With this feature, you can remove the burden of manually calculating the amounts and greatly simplify the efforts to calculate the labour of any given job while reducing the potential for costly errors and disputes.
  • One-click payroll processing – Here is the feature that every employer will love. The one-click payroll process allows you to run payroll with one click after all data is entered and verified. This feature greatly simplifies the payroll process, saves time, and reduces the possibility of delays in employee payments. It can also automate tax calculations and deductions, cutting the workload further and ensuring accuracy.

By considering these features, you can increase your chances of getting a payroll system that matches the needs of your business and has the features you need to simplify paying employees.

Determine the Type of Compensation You Offer Employees

There are three main types of compensation to consider. Each one has its merits and demerits. What your company chooses largely depends on your industry and its standards. Some businesses may have the luxury of choosing the compensation they can offer their employees or even opt for a mixture. The common types of compensation include;

Hourly wages

Hourly wages are paid based on their work hours during the pay period. These employees are typically entitled to overtime pay if they work more than a specified number of hours per week. Under this type of wage, employers must accurately track the hours worked by these employees to ensure they are paid correctly and comply with labour laws.

Salaried employees

Salaried employees receive a set amount of money annually divided into regular payments. The payments can be sent out bi-weekly or monthly. The salary is ultimately not dependent on the number of hours worked.

Salaried employees are typically exempt from overtime pay. They receive the same pay even when they work more than the standard number of hours a week. However, this may vary depending on their job duties and salary level.

Commission-based employees

Commission-based employees only make earnings when they achieve some form of sale. Employees may receive a 10% commission for selling an item worth £500. However, many employers include commissions on top of hourly or salaried pay. This proves to be an effective way to improve employee performance.

Each of these compensation methods has different job roles. You may offer all three compensation types at your business for various positions.

Workout How Much to Pay Employees

After settling on the type of compensation for your employees, you will need to figure out how much to pay them.

Aside from meeting minimum wage requirements, what you pay your employees is up to your discretion. However, offering competitive wages is a wise idea. Not only does it help attract top talent that will accelerate the growth of the business, but it also helps with employee retention.

You don’t have to go with a figure off the top of your head. You can research what your competitors in the same field are paying their workers. You should aim to match at least what they’re offering whenever possible. Also, consider the type of work and where your employees are located.

Consider that certain jobs are in greater demand in different regions worldwide, which should be captured in the wages. If you pay lower than the average for similar work in the area, you will struggle to attract new employees.

Choose Your Payroll Schedule

At this point, you have worked through the most challenging parts of paying your employees. What is left is determining how often you want to pay them. Your country and region may have laws to make this easier for you. You can pay employees more frequently than the law requires, but not less.

Some employers choose to pay weekly, bi-weekly, semi-monthly or monthly. Choosing a payroll schedule compliant with local laws and balancing the needs and expectations of the business and employees will ensure everyone is happy.

In some countries, on-demand payroll is becoming popular. This is where employees are paid on the day work is performed instead of waiting for a regular payday. However, this is still a fairly new concept and may not yet feature in many locations, not to mention that it is complex and costly to implement.

Fill in the Necessary Paperwork

Now that your baseline is covered, it’s time to figure out how to add new employees to your payment system.

Once you’ve officially hired a new employee, they must complete various paperwork to be registered with a payroll number in your system and start receiving their pay and paycheques. These forms help employers withhold the required amount of tax from each cheque.

The paperwork needed varies by the employee’s country and region. Research what forms are required in their location, especially when paying remote workers. Also, if you hire employees in more than one country, you will need accounts in each country with different requirements and systems.

Calculate Employee Pay & Taxes

The first calculation determines the employee’s gross pay for a specific pay period. This will depend on the type of compensation they receive and the payroll schedule you use.

You will multiply hourly employees’ hourly wage by the total number of hours worked in that pay period. You will divide salaried employees’ annual salary by the number of pay periods in the year. For employees earning commissions, you will determine their total commission earnings and any hourly or salaried pay.

After determining what will make up gross pay in the pay period, you need to determine how much payroll and income tax must be withheld. This will depend on the employee’s location.

Lastly, you will need to look at any additional statutory deductions and contributions the employees pay into, such as insurance policies and retirement plans. Subtract all the taxes and deductions from their gross pay to calculate their final net payment.

Before moving on, you should always validate the output of your payroll. If you use in-house payroll, the person who validates it should be a senior management team member, HR team member, or finance member. Where the payroll is outsourced, the partner should provide a pay register to check against. Once satisfied, you’re good to go.

Distribute Employee Pay

After completing the above steps, you can finally distribute pay to your employees. Most businesses pay their employees with Cheques or direct deposit. But other payment methods might also be relevant to your business.

File Necessary Tax Forms

The final step of the employee payment process is filing the necessary tax forms and making third-party payments to tax, pension and benefit providers.

The process of depositing employee taxes to the necessary tax collection agency varies depending on the employee’s location. Make sure you review the relevant requirements for your employees.

As good practice, you should keep payroll records dating back several years in the event of an audit. Keep the information organised, accessible and secure in case you need to provide it.

What Are the Different Ways to Pay Employees

Thanks to technology, employers now have various ways to pay their employees. It’s no longer cheques or cash anymore. However, these traditional methods still linger and have their benefits, as you’ll see.

Cheques

This is known as the traditional way of paying employees. Employers write a check for the net amount due after all deductions, such as taxes, pensions, and healthcare contributions. Cheques are mostly common among medium and small business owners with few employees because the employer can manage to write the checks.

Advantages of paper checks

Unlike other modes of payment involving electronic funds transfer like direct deposit, employees don’t have to open a bank account to get paid by cheque. They can cash the cheque through a cheque-cashing service. Additionally, you can distribute pay stubs to employees immediately.

Disadvantages

This is a time-consuming task, especially when dealing with a large workforce. Misplacing checks’s also possible, which becomes problematic for employers and employees.

Direct deposit

Direct deposit is an electronic funds transfer method or EFT that allows your employee’s paycheck to be deposited directly into their bank account. This method eliminates the need to issue cash cheques. It can also save the employer money on printing and postage costs.

Employers initiate direct deposit payments by providing employee bank routing and account numbers to the payroll processor. The funds are transferred electronically on a set date.

Advantages

This is a popular mode of payment because it is efficient and secure. Employees don’t have to worry about lost or stolen cheques, and employers are assured that their employees’ pay is deposited into their bank.

Disadvantages

Setting up the direct deposit is challenging and subject to human error. However, it is a one-time activity. Also, direct deposit has fees that include setup fees and monthly fees.

Pay cards

Also known as payroll or prepaid cards, these are automatically loaded with the employee’s pay every payday. The cards work the same way as credit or debit cards. The only difference is that the money tied to the card is exclusively from the employee’s wages.

Payroll cards are a good option for employees who don’t want to use a bank account to receive their pay but want a payment method that is more secure than cash or cheques.

Advantages

Using pay cards eliminates the stress of printing checks and saves time that you can use for other essential business-growing duties. Also, your employees don’t need a bank account to access their wages, which is another huge plus.

Disadvantages

Employees may have to pay some fees, including a monthly maintenance fee, when using the pay card. Depending on your service provider, the employer might also be required to clear the fees on the employee’s behalf. You will also offer other payment options like direct deposit for the cards to work.

Cash

This is possibly the oldest employee payment method in the books. It involves handing over employee wages face-to-face. It doesn’t feature any technical process. If you decide to use this method, you should remain extra careful when updating your accounting register.

Advantages

The main advantage of using the cash payment option is accommodating employees not well-versed in technology. Of course, this option doesn’t require maintenance, withdrawal fees, or spending on setting it up.

Disadvantages

Managing and keeping track of your payroll when you pay in cash can be challenging. It gets even harder when you don’t update your accounting documents correctly. Additionally, the cash payment method is time-consuming when dealing with many employees, not to mention the safety and security risks of keeping large sums of money in one physical location.

Mobile wallets

This is one of the newer payment methods spurred by technology. A mobile wallet is a virtual wallet that stores payment card information on a mobile device like a smartphone. With a proper business account, employers can use the mobile wallet to pay employees and other vendors.

Advantages

Mobile wallets are convenient for employees because they can use their phones to make payments. They also reduce fraud since the transactions are encrypted. Generally, the money transfer process is quick and instant in most cases, and the benefits extend to both employees and employers.

Disadvantages

Some of the mobile wallet platforms are not meant for payroll. Using them creates an auditing nightmare partially because there is no way to restrict payments between employees, managers and the company.

Also, you can’t use these methods for batch payments. You would have to make a payment for every employee separately. However, some options like Pay iO have features that make paying employees and suppliers easier, especially for repetitive payments like salaries.

If you have to use this payment method, you should have a third-party accountant or bookkeeper familiar with how mobile wallets work to help you keep up with payroll taxes.

How to Avoid Mistakes When Paying Employees

Mistakes are inevitable when running a business and even when paying employees. However, knowing where the mistakes are most likely to happen can help you avoid trouble. Some of the most common mistakes employers make when paying employees are;

  • Misclassifying workers – Most countries have laws on how you should classify their workers. The laws might further dictate how workers must be paid based on their classification. Misclassifying workers often happens when an employee is listed as an independent contractor or vice versa. It can result in the business being fined or facing tax consequences.
  • Missing payroll tax payments – You should be conversant with the tax payment due dates, which vary by location, and adhere to these deadlines wherever you are. Not making your rax deposits on time can result in fines and penalties that you should avoid. You can do this using a system that automatically makes these payments by their due date.
  • Not staying current on payroll laws – Labour laws are always subject to change. Staying up to date with the changes can be difficult. In many cases, what is required by law will likely change over your business’s lifetime. You need to follow those changes and stay current with any relevant changes associated with your business.

Closing Remarks

When it comes to paying your employees, it’s not just a requirement, but it is mandated by law. However, every business should pride itself in paying its employees fairly and promptly to improve morale and increase productivity. This guide covers everything you need to know about paying your employees and even pitfalls you should look out for. 

Rapid Setup, Web & Mobile Access, FX Exchange

Related Posts

CHAPS Vs BACS

by | Apr 13, 2024 | blog | 0 Comments

CHAPS and BACS are the UK's most commonly used payment systems for transferring large volumes of money. They are commonly used between businesses and are also commonly...

Best Business Current Account for a Construction Business

by | Apr 13, 2024 | blog | 0 Comments

Getting a current account for your construction business can be one of the most important things you do for your business. The nature of construction businesses, in...

Best Current Account for Vape Businesses

by | Apr 13, 2024 | blog | 0 Comments

Running a successful vape business requires a reliable current account to process payments. While many businesses are spoilt for choice in the type of current accounts...

Best Multi-Currency Account

by | Apr 13, 2024 | blog | 0 Comments

A multi-currency account can make it easier for businesses to pay for goods and services and receive payments from customers and clients from different regions. The...

Best International Bank Account

by | Feb 28, 2024 | blog | 0 Comments

International bank accounts are an asset not just to businesses with interests outside the UK but also to expats, travellers and even students. If you constantly move...

Best Business Bank Account for Startups

by | Feb 28, 2024 | blog | 0 Comments

Choosing the right business account and partner is one of the most important decisions a startup can make in its early business journey. With so many players in the...

What is an EMI?

by | Feb 28, 2024 | blog | 0 Comments

Electronic money institution, EMI, or e-money institution is a confusing term for many people partly because it is not mentioned in any regulation or legislation. If...

Best Prepaid Cards for Business

by | Feb 28, 2024 | blog | 0 Comments

Businesses must solve the challenge of fluid efficiency by allowing their employees to access cash for expenses while cutting back on wastage and unnecessary...

How Do Business Loans Work?

by | Feb 3, 2024 | blog | 0 Comments

Finances are the driving force behind every business. At some point, the business will need more money than it can generate to remain afloat, fund an aggressive...

Business Accounts
For the Digital Economy

Easily manage your everyday financial operations with your own business account. No branch visit needed. We execute both incoming and outgoing UK Faster Payments, BACS, Direct Debit and SEPA payments with all EU banks that support SEPA transfers

Discover

Sign Up