How Sri Lankan Small Businesses Are Handling Their Payroll in 2022

How Sri Lankan Small Businesses Are Handling Their Payroll in 2022

For small businesses, payroll is traditionally one of the highest operating costs and the heaviest administrative burdens, especially for companies that manage payroll manually. The worst part about handling payroll manually is that it can lead to mistakes resulting in stiff penalties and unhappy employees.

Consider the following statistics in understanding the impact of a proper payroll. A QuickBooks report revealed that 25% of workers (in a US study) had received a paycheck with errors! Plus, there is a greater possibility of salary payments being late in smaller businesses with 20 staff members or less. This can lead to dissatisfied employees, a high turnover rate, unnecessary regulatory fines, and damage to the company’s reputation.

Payroll problems are rampant as calculating involves many components and can be complex for a small business to handle. Therefore, getting a payroll software provider with limited mistakes and errors is crucial for retaining employees.

What is a payroll system?

A payroll system calculates an employee’s wages by calculating and deducting taxes and other deductibles, printing and delivering checks, and filing government employment taxes.

Payroll can be done in-house, be outsourced or by implementing payroll software. Payroll Software requires minimum input from employers as they only need to input wages and hours worked if applicable.

We use different payroll systems in Sri Lanka. While a large firm might have an in-house payroll system to handle everything, a small business might consider outsourcing or using payroll software to save time and money.

In-House payroll is suitable mainly for small companies with a limited number of employees who have consistent work hours from week to week. However, calculating payroll in-house means that the company keeps its payroll employee apprised of any changes to payroll tax laws and labour laws.

When a company realizes they don’t have the expertise amongst their employees to complete payroll or have payroll needs exceeding their staff’s capacity, they typically outsource payroll by hiring a bookkeeper, a Chartered Public Accountant (CPA) or an agency to manage the process. Outsourcing the payroll incurs a considerable cost, and it still requires effort on the company’s end to ensure its accuracy.

An exciting and emerging option in payroll management is to use a software-managed solution. These computerized payroll systems are gaining popularity because they are cloud-based, are automatically updated with information and are available 24/7 with your company’s data. The business will still have to manage it in-house, but the effort, time and cost are low!

Is having payroll software for small businesses the right move?

Payroll software for small businesses is a versatile tool that automates most processes. This makes life easier for HR since they don’t have to enter all the data and calculate deductions manually.

To understand if payroll software is the right move for small businesses, let’s analyze the pros and cons of each payroll system:

1. In-House Payroll

In-House payroll mostly suits small businesses where an employee is delegated to handle payroll, or the owner does it alone.

Managing payroll in-house can have various meanings-

  • Using stand-alone payroll software or integrated payroll software to calculate payroll.
  • Process payroll that has limited irregularities and complications.
  • Calculate payroll manually.

Pros of an in-house payroll

  • Company privacy is maintained, considering all the financial data remains only with the staff who work for the small business.
  • The whole function of the payroll process is completed by the small business staff, including making bank deposits.

Cons of an in-house payroll

  • Requires the company to keep its employees notified of any changes to payroll tax laws and labour laws.
  • It lacks the checks and balances of other systems and can be subject to errors that may take longer to be detected.

2. Bookkeepers/CPA (Certified Public Accountants)

Pros of Bookkeepers/CPA

  • Hiring an external bookkeeper or CPA to complete your small business payroll increases the potential of the accounting department due to the frequent changes to labour laws and payroll tax requirements. Keeping a staff member focused on payroll ensures that the company complies with most regulations.
  • Hiring a bookkeeper or CPA ensures that the small business creates a system of checks and balances in the payroll process.

Cons of Bookkeepers/CPA

  • Sometimes a bookkeeper or CPA may not be familiar with the workings of your small business, which can lead to making mistakes that an in-house employee might not make.
  • A bookkeeper or CPA firm may not complete the entire payroll process, which means that your employees still need to be involved in completing payroll.
  • Agency managed payroll can be a more significant expense for small businesses than other options.

3. Using a payroll software

When considering having payroll management software, you may think of a list of payroll systems like Humanised, Xero or Quickbooks payroll software.

These computerized payroll systems are becoming famous because they:

  • They are cloud-based and are available any time from any location.
  • Automatically calculates payroll information based on the employee’s data from time records and other systems recorded into the system.

Pros of payroll management software

  • Available any time from any location.
  • Automatic calculations are provided.

Cons of payroll management software

  • Requires in-house employees to communicate with the system.
  • It lacks the checks and balances of other systems that engage outside expertise.

Therefore, you need to select the best payroll system which suits your company, reduces unnecessary errors, has the highest level of expertise available to your company and creates the most significant capacity and capability for the small business.

While it’s practical for larger businesses to employ an accounting team to calculate payroll and thereby outsource it, small businesses operate efficiently with payroll software that is constantly compliant with tax regulations and labour laws.

Why are small businesses handing over payroll to payroll outsourcing companies in Sri Lanka?

For many small businesses, outsourcing payroll can save time, reduce compliance risk, and ensure employees are paid accurately and on time so that small businesses can focus on the bigger picture of growing their business.

Sri Lanka undergoes rapid changes in employment laws and business regulations, making it more challenging for employers to manually handle some or all payroll aspects. Payroll has become an increasingly complex process, requiring EPF/ETF/APIT statutory payment compliance and paying staff on time to ensure employee satisfaction and avoid penalties.

A clear example of this: The Inland Revenue (Amendment) Act No. 10 of 2021 states that APIT tax (Advance Personal Income Tax) would replace the previous PAYE tax, and employers will be required to deduct APIT from payments made to their employees and remit to the Inland Revenue Department.

When you outsource your small business’s payroll, professionally trained experts will take care of the payroll process until the very end. After the payroll is set up, these experts will look after your payroll processing and reporting. This includes calculating tax deductions, meeting government remittance deadlines, preparing your payroll for year-end, and handling pay-related employee inquiries. You should ensure that accurate employee information and hours worked are submitted from the employer’s end. Before processing payroll, you’ll also have an opportunity to review your payroll expense for the pay period and see the reports that give you the right amount of insight into your labour spending.

As Sri Lankans, we rely on manual labour rather than automating tasks; we tend to outsource our work rather than use software regardless of the hefty cost.

However, times are changing, and businesses are moving towards adopting improved and efficient working methods; payroll software might be the wise solution. The onboarding time for payroll software is all it takes to get your payroll done right!

Who are the leading local firms for payroll services for small businesses?

To have a more comprehensive understanding with a list that spans both local and global Chartered Accountancy firms, Management Consultancy firms and dedicated Payroll Service firms, where the majority are recognized as Approved Training Partners of CA Sri Lanka, read our article on Payroll service companies in Sri Lanka.

You can now refer to our article on the payroll software comparison to get a broader idea of the leading payroll service providers in Sri Lanka for small businesses and select the best payroll software based on your small business requirements by comparing the features and benefits of each payroll software.

Therefore, we hope that this article has provided you with an in-depth understanding of how Sri Lankan small businesses are handling their payroll in 2022 so you can successfully manage your payroll wisely.


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