What To Do if You Can't Make Payroll

Managing cash flow — money moving in and out of your business — can be arduous. Even though you're bringing in sales, you may not have collected on invoices, leaving you short of cash to pay your bills or even make payroll. No matter the financial situation your business is in, paying employees is vital. Payroll isn't only a legal obligation, but also a promise to employees and their families that they'll be fully compensated on time. Disruptions specific to the business and the business landscape at large can derail the best-laid plans and cause employers to worry about meeting payroll. Read on to learn more about how you can anticipate payroll problems, what to do if you can't pay your staff or the business hits a roadblock, and solutions that can help you meet payroll obligations — even if you're in a cash crunch.

Anticipating Payroll Problems

A big payment due from a customer is late. A restaurant faces a sudden spike in food costs. A hair salon must reduce its operating hours due to staff shortages. When these or other unanticipated events impact the cash levels in your bank account, you still need to make payroll and pay associated taxes on time. How can you anticipate the unanticipated? While you can't control the unexpected, there are ways to scrupulously monitor cash flow to ensure you'll have the money to meet payroll.

Watch Your Bank Account

Keep your eye on what's going on daily by using tools to help you monitor your cash flow. For example, you can get reminders about upcoming bills so you can check whether there's cash on hand to make payments or take steps to address the shortage.

Check Your Metrics

There are certain equations financial professionals use when assessing cash flow. For example, "days sales outstanding" measures how long it takes to collect receivables (the shorter the better). Your accountant may be able to help you run the numbers.

Forecast Cash Flow

This measurement projects sales and expenses based on your prior history. Compare it to your actual cash flow to see the direction in which your company is moving. This comparison can detect changes that may impact cash flow down the road.

Consequences of Delaying or Reducing Payroll

Can employers delay payroll? Technically yes, but it's important to understand the consequences of missing payroll or processing payroll late. The reality is that employers should do everything they can to avoid stopping, delaying, or reducing payroll. A delay, reduction, or refusal to pay employees may result in legal action and fines. For example, you may face fines from government agencies if you don't remit payroll taxes, and an employee can file a claim against the business for unpaid wages. In addition to financial consequences, there's your relationship with employees to consider. Once an employee is either paid late or not at all, this can dissolve their trust in the business and possibly even lead them to quit.

When You Can’t Make Payroll

Prioritize Payroll Obligations

Watching cash flow is a good place to start, but it's only part of the solution for ensuring you can pay staff every pay period. Prioritize your cash outflow to help ensure there is money on hand to pay your workers, as well as payroll taxes.

When it comes to payroll, two costs are a priority:

Employee paychecks: Under the Fair Labor Standards Act, employers are obligated to pay employees for hours worked on regular paydays for the pay period covered. Several state and local wage payment laws impose additional timing requirements employers must meet when paying employees.

Payroll taxes: These taxes fall into two categories: employer taxes and trust fund taxes (employees' income tax withholding and their share of FICA). Employers delinquent on their employment taxes (the employer share of FICA, FUTA taxes, and state unemployment taxes) are subject to interest and penalties. Owners who fail to pay trust fund taxes can be 100% liable for the money.

Other essential payments may include:

Utilities and rent: Running your business without electricity or internet access can make it nearly impossible to get anything done, so it's important to keep up with these payments.

Aging payables: Bills that are more than two months overdue can greatly lower your credit rating and make it more difficult to obtain financing.

Suppliers and vendors: If you're a retailer, restaurateur, wholesaler, or manufacturer, you need to stock your shelves to stay in business. You may be able to work out special financing terms with these parties if you've been a good customer in the past.

Beyond these essentials, review insurance policies, some of which are mandatory (e.g., generally workers' compensation, vehicle insurance, etc.), while others may be discretionary, but highly advisable (e.g., liability insurance). Before canceling a policy, work with your agent to see whether you can improve cash flow by reducing premiums or by increasing deductibles, limiting coverage, or making other policy changes to make the coverage affordable. And if the business has credit card debt, try to pay the minimum due each month to preserve your credit rating.

Notify Your Employees of a Payroll Issue

If you can't make payroll and meet the financial obligations listed above, know that these are serious issues you must communicate to your staff. Employees should be notified upfront if there is an issue (they shouldn't be left wondering where their check is on pay day), and you should communicate the steps you are taking to remedy the situation, including timeframes for addressing the issue. Keep in mind that delaying payroll should be the last possible action you take.

Consider Liquidating Assets

If you find yourself in a situation where there's no capital available to meet your financial obligations, including paying employees, you may want to consider liquidating assets. Liquidation can be part of ending business operations, but it can also mean selling off inventory and assets to satisfy creditors. In this case, assets are first distributed to secured creditors (e.g., banks), followed by unsecured creditors, which includes employees who are owed money.

Seek Alternative Forms of Capital

There are many forms of small business financing, including resources that can help you continue your recovery from financial hardships. You should consider talking to your financial advisor for the best option. Depending on your situation and how quickly you need access to capital, particularly if you're struggling to make payroll, there are some options to consider:

Taking a discount on your receivables: To get emergency payroll funding, consider accounts receivable (A/R) discounting in exchange for cash balances. When you do this, you sell unpaid outstanding invoices for a cash amount that's less than the value of those invoices.

Securing hard money lending: A hard money loan, which is commonly issued by individuals or private investors, is short-term, asset-based financing, where you use property as collateral against the loan.

Using merchant financing or merchant cash advances: As a means of alternative financing, you can consider merchant funding, which uses your credit card processing system to pay back money loaned. With each credit card transaction, the merchant financing lender takes a daily percentage of your transactions as a form of repayment. This continues until your loan and interest are fully repaid.

Selling stock at a significant discount: Selling company stock shares at a discount can help you raise money if you have a short-term need for capital to pay employees. In this scenario, buyers purchase ownership shares at a discount for less than the business' current market value. While you as the owner lose some ownership (depending on the amount of ownership stake purchased), selling stock at a discount doesn't require you to take on new debt.

Work with an invoice factoring company: If your company has unpaid invoices from customers, invoice factoring is a funding option that could help you make payroll. This funding solution is especially useful for small businesses that may not have access to traditional bank loans or lines of credit.

Can I Pay Employees Cash in Hand?

There are no laws preventing you from paying staff cash in hand, but there could be potential rules against changing an employees elected method of payment without consent and you must be mindful to accurately withhold tax deductions from these wage amounts. Failure to do is considered paying employees under the table, which is illegal. That's why paying employees cash in hand can not only lead to payroll errors, but it can also be risky for the business. Consider using an online payroll system, which can help ensure you're paying employees accurately and staying in compliance with appropriate wage and hour laws.

How To Help Make Payroll

You may also be able to avoid a future cash crunch by partnering with a reputable payroll services company with programs that help with unexpected business challenges. For example, Paychex Promise^®1 provides businesses with the flexibility to extend the collection of payroll funds.

Payroll Protection

If you're experiencing temporary cash flow issues or something unexpected prevents you from making payroll (customers don't pay their bills on time, it's the end of the day or you're on vacation), payroll protection extends the collection of payroll funds from your business bank account by up to seven days without service interruption or insufficient fund charges. Paychex Promise¹ is a smart way to protect your cash flow, build credit, and confidently pay employees.

Same-Day ACH Payments

Last-minute payroll processing for issues such as forgetting to run payroll or having to pay a terminated employee on the same day can be costly. To combat this, same-day ACH allows employers to send direct deposit payments to their employees, and employees can receive these payments, on the payroll check date. Paychex Promise customers can process up to two same-day ACH requests each subscription year at no additional cost.

Small Business Loans

Consider applying for a small-business loan if you need to cover unexpected expenses, want to invest in certain areas of the business, or are looking to focus on growth strategies. Get access to lending options through external financing sources so you can obtain funding for your business needs while also keeping other pertinent areas of the business — such as payroll — running.

Meet Your Payroll Obligations With Confidence

No matter the challenges you face, the failure to meet your payroll obligations can get you in serious financial trouble and destroy your relationship with employees. Look for warning signs that could jeopardize your ability to meet payroll, and act immediately so that your employees get paid on time, the government receives employment taxes, and you stay out of trouble. Consider working with a payroll provider that offers the additional safety net of payroll protection to help ensure a smooth payday at your business every pay period.

¹ Paychex Promise will be offered free of charge to business owners for the first three months of service, and thereafter will be offered as a complete suite of services for a fixed, all-inclusive fee. Program and/or any of the services offered as part of Program are subject to eligibility and are void where restricted by law.

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