What Happens If You Can’t Make Payroll?

Making payroll is an essential business function

Your employees are one of your business’s most valuable assets; without them, you wouldn’t be able to provide services or products. As a small business owner, you need to foster a positive work environment and ensure your employees are fairly compensated for their work. 

As such, you should avoid missing payroll at all costs. If you miss it, not only will your employees look for job opportunities elsewhere, but you could also face legal trouble.

“Small employers need to be looking several moves ahead before this problem is looming,” said Susan Hosage, senior consultant at OneSource HR Solutions. “The sooner a business owner recognizes that they are running low on cash, the more [they] can do to avoid this issue.”

Once you realize you have a cash flow problem, follow these steps to pay your employees.

What to do when you can’t make payroll

1. Evaluate accounts payable and accounts receivable.

You need to track and understand your cash flow to stay successful. Part of cash flow is knowing whom you owe and who owes you. Hosage recommended evaluating your accounts payable because extending payment terms and paying late fees have less harmful consequences than failing to pay employees.

In addition, stay on top of your accounts receivable, Hosage said. “The quickest way to run out of money is by failing to collect payments that are due or overextending credit to customers,” she added. 

2. Assess your employees and control hiring.

When you’re short on cash, you need to evaluate where your money is going, and that includes the employees you are paying.

“Evaluate whether they are spending time on work that positively contributes to the business or are simply filling their time with work that doesn’t have a return,” Hosage said.

Some small businesses overhire in anticipation of new business. If that business doesn’t materialize, owners won’t have the money to keep up with additional salaries. Hosage recommended reallocating work to ensure payroll is manageable.

3. Consider every resource available.

Before you accept defeat and miss payroll, look at every source available. Take inventory of your equipment and employees, and ask loved ones for help.

“When faced with the reality of not being able to make payroll, a small business owner has no choice but to turn to every source possible: family, savings, financing or liquidating assets,” said Brock Blake, CEO and co-founder of Lendio.

4. Be honest with employees.

If you can’t come up with the cash, be honest with your employees.

“Be 100% honest and tell them that you are working to remedy the situation as soon as possible,” said Mark Mandula, senior vice president at United Capital Funding. “Get a plan, and then communicate with them along the way.”

Blake agreed. “It’s crucial to inform your employees as soon as you’re aware of the cash shortage, and give them the freedom and understanding to look for new employment.” 

Tips for making payroll

Of course, it’s best not to miss payroll in the first place. Here are some tips for making sure missed payroll doesn’t become a recurring problem:

1. Plan. “Plan ahead, and always work to maintain a reserve or rainy day fund,” Mandula said. “Also consider setting up a line of credit that you would only use in emergency situations.” Here are four steps to creating a payroll budget.
2. Communicate with your provider. “If you can’t make payroll, communicate with your payroll provider and see what options they might be able to provide you,” Mandula added.
3. Use a payroll service. Payroll services that make it easier to make sure your employees are paid. These services can automatically calculate how much each employee should be paid, which makes it easier to plan for payroll. Here are Business News Daily’s picks for best payroll software.
4. Apply for a loan. If you’re short on money, you have a few options until the cash comes in, such as applying for a loan or a line of credit, delaying payments to vendors, and liquidating assets.
5. Invest in a payroll tax manager. Rather than handling payroll personally, invest in a payroll tax manager who can help you stay on track. Hiring a professional ensures that your payroll will be processed more efficiently.
6. Switch to a monthly pay schedule. A monthly schedule makes the payroll process much easier and can reduce the amount of time and resources spent on payroll. 

7. Set up direct transfers or payroll taxes. Typically, payroll tax payments are transferred from your company account directly to a government account. If not, know that delaying tax payments results in penalties, which can be costly and hurt your ability to meet payroll.
8. Create a separate account for payroll. This method is especially helpful for smaller companies; it’s vital to set aside enough money to pay your employees.
9. Plan for employee benefits. To retain your employees for the long term, you will likely want to offer benefits. Nevertheless, these benefits can be costly and disrupt your ability to make payroll. If you set funds aside and plan how you will provide these employee benefits over time, however, you will avoid these issues.
10. Consider using paperless payroll. Paperless payroll systems can save you money, time and aggravation. You can choose from multiple paperless payroll services, but do your research to ensure you comply with local laws concerning how employees are paid and how payroll records are kept.

Doing what’s necessary to make payroll

Businesses that can’t make payroll won’t stay open for long. Last-minute efforts to pay employees in full and on time can result in steep penalties, high interest payments and other problems. The best way to get employees paid is to plan ahead and have one or more contingency plans.

Additional reporting by Alex Halperin.