How Should I Pay My Employees?
There are lots of things to consider when hiring employees for the first time. One of the biggest things to consider is how to pay your employees – including how much, how often and in what form of payment. This guide delves more into some of the considerations you’ll need to make when paying employees.
Hourly pay or salary?
Most companies provide a salary or pay by the hour. Both can have their advantages, depending on the nature of the business.
Hourly pay is ideal for employees working shifts with a strict start and end time – particularly employees whose hours regularly change from week to week. In order to pay by the hour, you need to be willing to calculate work hours for each individual employee. Timecards or time clocks can be a way of making this easier for you by getting employees to record the time they clock in and clock out (time clocks automatically calculate hours and pay for you, and are the most efficient option).
A salary can be more suited to jobs with set unchanging hours each week. It can also be suitable for jobs with more relaxed working hours where it may not matter when an employee starts or ends their shift so long as they produce quality results by deadlines. Salaries are typically a much simpler way to pay employees, but may not be suitable for jobs where employees are not producing the same output each month.
There are other ways to pay employees such as commission-based pay or results-based pay (such as a writer being paid per word), however most companies will primarily offer either hourly pay or a salary. Businesses that engage independent workers may also work with a contractor of record to handle payments and compliance for contractors outside of the standard payroll structure.
How much should you pay?
Once you’ve established how employees get paid, you should consider how much you will pay them. This needs to be a fair amount that will attract employees while also being realistically affordable based on your projected revenue (between 40 and 80% of your business revenue should go towards employee salaries).
Most employers work out how much to pay employees by comparing the pay offered by other companies – you can do this by checking out job ads and reading reports. It’s important that you don’t pay less than the legally required minimum wage in your area. You should also consider paying more for managerial roles or those that have more responsibility. Check out this guide for more information on how much you should pay.
How often will they get paid?
Next, you should consider how often employees will be paid. Most companies either pay weekly, fortnightly or monthly.
Paying employees weekly can be more work for you as it means having to make sure pay goes out every Friday. Many companies do find it easier to budget for though than having to pay large instalments each month, plus many of you employees may prefer to get paid weekly as they don’t have to wait as long for each payday.
Paying monthly is less work and some employers with busy schedules prefer it because of this. However, it does mean bigger payments for you, plus employees will have to budget harder each month in order to make their money stretch until the end (for lower paid jobs, you could find that it’s more of a financial struggle for employees because of this).
Fortnightly pay can be a happy medium between the two. It’s less common because it’s a little harder to keep track of, but it’s worth considering.
Something to consider when deciding a payment schedule is how often your company gets paid. Companies that are constantly receiving revenue each day or week may find weekly wages easier to budget for. If you only have a few clients and they pay every month or every two months, you may want to consider paying employees monthly.
Cash or bank transfer?
You can either pay employees in cash or pay them via bank transfer. Most companies nowadays pay by bank transfer because it’s faster, more secure and easier.
Paying in cash may be beneficial if you take in a lot of your revenue in cash. For example, if you run a market stall and most people pay you in cash, you may find that it’s preferable to pay any employees in cash. Remember that tax needs to still be paid on cash revenue – paying employees in cash to evade tax is illegal and could be very expensive if you get caught out.
How will they get their payslip?
A payslip can serve as a receipt of the transaction. Some companies give employees a paper payslip, however most payslips nowadays are digital.
The most common way to give employees payslips is to email them. Alternatively, if you have a website or app that employees can privately log into, you could consider sharing payslips here.
What benefits will you provide?
On top of giving employees a wage, you need to consider what added benefits you will provide. There are many different employees benefits that you can offer, which could include:
- Sick pay
- Vacation pay
- Paid health insurance
- Health savings account contributions
- Holiday extra pay (such as double pay for working on Christmas Day)
- 401(k) or private pension payments
- Company car and paid car expenses
- Work-provided phone or laptop
- End of year bonuses
A generous benefit package can make working at your company more attractive, however you need to be certain that you can afford to pay for it. Consider your revenue and how much you can realistically spend on your employees.
Certain benefits may be legally compulsory within your state, while others may be optional but recommended. It’s worth looking into your local state laws and also seeing what is expected from other companies in the same industry (if every other company offers health insurance to employees, you probably should do).
What about tax?
It’s important to remember that every employee pays tax and that you must pay a portion of this. The federal payroll tax is about 15.3% – the employee and employer each cover 7.65% of this.
Make sure that you are deducting tax every time you pay your employees. Different states may have different laws when it comes to paying tax.
What software should you use?
Most employers can benefit from using payroll software to help pay employees. Such software may be able to automate the entire process from calculating pay to sending over payments and payslips. These programs can also help you manage benefit packages by making automatic contributions to tax, insurance and pensions. Some can even help you to keep track of absence so that you can determine exactly how much paid sick leave or vacation pay an employee has left.
The best payroll software for your business may depend on how many employees you hire and the range of benefits you offer. You’ll usually pay more for more complex programs, whereas basic programs are usually very cheap.
Some payroll programs may be integrated with accounting software or time clock software, while others may simply help with the payroll process. You should consider whether you want all of this integrated or whether you’d prefer to use individual programs for all of these processes. You’ll find plenty of software options online – many of which have free trials. This post compares some of the best rated payroll software options used by employers in the US.