Every small business goes through periods of scarcity. They must learn to operate on a tight budget if they expect to thrive over the long-term. Unfortunately, some expenses are constant, regardless of the fiscal uncertainty of your company. Payroll is one of them.

Once you have onboarded an employee, you are obligated to provide the contractually agreed upon wages that you promised. Failure to meet this expense can get you in trouble with the labor board.

You need to be smart about navigating fiscal problems without compromising your obligation to pay your employees. Here are some things that you need to do to avoid running into payroll problems down the road.

Look at other forms of compensation

Sometimes you may not have the option of paying a steep salary to your employees. The good news is that offering other forms of compensation can be a good way to both reduce payroll taxes and create a greater perception of value to your workers.

Health insurance is one of the most common forms of compensation other than a director salary. Health insurance companies have lobbied to make sure their services were not subject to payroll taxes when offered as part of an employment compensation package.

You can also offer regular gift, such as corporate gift cards to your employees. This is a good way to boost morale without having to pay a large salary to them. Before you begin offering corporate gift cards or other gift incentives to your employees, you will want to make sure you know what types of gifts will be most appreciated.

Don’t be too generous with your salary offers during periods of prosperity

All businesses go through boom and bust cycles. Some startups are lucky enough to have a solid cash flow shortly after they open their doors. This can be a great opportunity for them to build a cash reserve to stave off future slow periods.

Unfortunately, a period of financial prosperity may lull them into a false sense of security. They may believe that all of their future quarters will be equally profitable. This may lead them to make poor decisions, such as offering new employees far more money than they can afford over the long-term. This can put them in the uncomfortable dilemma of choosing between alienating their employees by cutting their salary in the future or running deficits that could bankrupt them in the future.

When agreeing to a salary, it is important to base the figures off of realistic long-term projections. You can’t afford to offer generous contracts with your rose-tinted glasses on. Make it clear to new employees that you are a startup and intend to offer a better compensation in the future but must assess your company’s long-term profitability first.

Consider using independent contractors for certain functions

You don’t need to hire a full-time employee for every project that is completed within your organization. You can consider taking on independent contractors as well. There are a couple of key benefits to using a 1099 contractor rather than a 1040 employee:

  • You don’t need to pay benefits to contractors. This can save you a lot of money on health insurance and retirement plans.
  • The contractor is responsible for their own payroll taxes. This will reduce your payroll expenses by over 15%.
  • You can discharge independent contractors much more easily. You won’t create the same morale concerns by scaling back on independent contractors that you would face if you terminated full-time employees.

Using contractors can be a great way to reduce your financial liability. However, it is still important to make sure you choose them wisely.