5 Things Every SME Owner Must Know About Payroll Compliance

For many Nigerian small and medium-sized business owners, payroll is simply about paying staff on time. But in reality, it’s much more than that. Payroll involves following specific legal processes like calculating employee salaries accurately, deducting required contributions and taxes, remitting them to the right government agencies, and keeping proper records.

Many SMEs get into trouble because they either don’t understand payroll laws or believe that only large corporations must follow them. This misconception can lead to serious consequences including government sanctions, backdated penalties, and even legal action. Whether you’re managing a team of 3 or 30, compliance is not optional, it is the foundation of running a responsible, scalable business.

This blog post explains what payroll compliance means in Nigeria, why it’s important, how to stay compliant, and most importantly, the five legal obligations every Nigerian SME must take seriously.

What Is Payroll Law & Compliance in Nigeria?

Payroll law refers to the rules and regulations that govern how employers handle employee compensation in Nigeria. These laws cover everything from salary calculations to statutory deductions like tax, pension, and housing contributions.

Payroll compliance refers to how your business applies and follows these laws through accurate salary calculations, timely remittances, and proper record-keeping.

Together, these laws ensure that employers do more than just pay staff. They protect employees’ rights to social security, retirement savings, and housing benefits.

In Nigeria, several government agencies enforce payroll compliance. The Federal Inland Revenue Service (FIRS) oversees personal income tax collection. The National Pension Commission (PenCom) regulates pension contributions. The Federal Mortgage Bank of Nigeria (FMBN) manages the National Housing Fund (NHF).

Why Payroll Compliance Is Important

Payroll compliance is a legal responsibility. When businesses fail to follow payroll laws, they expose themselves to significant risks. These include government audits, hefty fines, employee disputes, and reputational damage. For small businesses, such penalties can be crippling.

Beyond the risks, compliance brings many benefits. A compliant payroll system builds employee trust and loyalty because it shows you care about their financial wellbeing. It also enhances your credibility as a business, especially when you’re seeking partnerships, contracts, or funding. Many large clients and government agencies now request proof of tax remittance, pension compliance, and staff welfare before doing business with any company. Simply put, payroll compliance isn’t just about the law, it’s also a growth strategy.

5 Things You Must Know About Payroll Compliance

From tax deductions to pensions and housing contributions, the rules are clear, and ignorance is not an excuse. Here are five essential payroll laws every Nigerian SME must know and how to stay compliant without stress.

1. You Must Deduct and Remit Employee Income Tax

The first and most basic payroll law every Nigerian SME must follow is the deduction and remittance of employee income tax, commonly referred to as PAYE (Pay-As-You-Earn). You must take this tax directly from your employee’s monthly salary and pay it to the State Internal Revenue Service where the employee resides.

This is not an optional contribution. If your employee earns above the tax threshold, the law requires you to deduct their personal income tax. Failure to do so not only affects your employee who may face tax issues down the line but also puts your business at risk of government penalties, interest charges, and tax audits.

To remain compliant, you must calculate the correct PAYE based on government-issued tax tables and remit the amount monthly. A digital payroll system can make this process easier and more accurate.

2. Pension Contributions Are Mandatory for Businesses with Three or More Employees

Many small businesses wrongly assume that pensions are only for large companies. However, under the Pension Reform Act of 2014, any employer with three or more employees is legally required to register with the National Pension Commission (PenCom) and contribute to the employee’s pension fund.

Here’s how it works: the employer must contribute ten percent of the employee’s basic salary (plus housing and transport allowances), while the employee contributes eight percent. These amounts are sent to the employee’s Retirement Savings Account (RSA), which is managed by a licensed Pension Fund Administrator (PFA).

Failure to register or remit pensions on time can lead to serious consequences, including backdated contributions, interest penalties, and sanctions from PenCom. Additionally, pension compliance is often a prerequisite when applying for certain government or corporate contracts, so skipping it can limit your growth potential.

3. You Must Deduct and Remit National Housing Fund (NHF) Contributions

The National Housing Fund (NHF) is a federal initiative that allows Nigerian workers to contribute towards affordable housing solutions. Employers are required by law to deduct 2.5% of each employee’s monthly basic salary and remit it to the Federal Mortgage Bank of Nigeria (FMBN).

While this deduction may seem minor, its impact is significant. Employees who contribute to the NHF become eligible for low-interest housing loans, making it a valuable benefit. For employers, however, non-compliance with this regulation can result in back payments and penalties if discovered during an audit.

Though enforcement has not always been strict, recent efforts to revive and fund Nigeria’s housing schemes have put NHF compliance back on the radar. Smart business owners are getting ahead of this by automating the deduction and remittance of NHF contributions as part of their monthly payroll process.

4. Payslips and Payroll Records Are a Legal Requirement

Beyond making deductions, employers are also required to maintain detailed payroll records and issue payslips to employees each month. A payslip should clearly show an employee’s gross salary, all deductions (such as PAYE, pension, and NHF), and their net pay.

These records must be kept for a minimum of six years, and they must be made available upon request by the employee, government agencies, or auditors. If there’s ever a dispute about salary payments, benefits, or taxes, your ability to present clear, well-documented payroll records is your best legal protection.

Some businesses still rely on manual records or simple spreadsheets, which are prone to human error and data loss. Switching to a digital payroll platform not only ensures accuracy but also provides secure storage and easy access to historical data when needed.

5. All Deductions Must Be Remitted on Time

Making the right deductions is only half of the job, those deductions must be remitted to the appropriate authorities on time. Each statutory body has its own schedule. PAYE, pensions, and NHF are typically due monthly, and delays in remitting them can result in penalties, interest charges, and even legal action.

Late remittances suggest carelessness or negligence, and over time, they can ruin a business’s cash flow if you’re forced to pay penalties. In severe cases, agencies have the authority to freeze business accounts or take legal steps to recover outstanding funds.

This is why timely remittance is a cornerstone of payroll compliance. Instead of scrambling to remember due dates, SMEs should embrace payroll automation tools that handle these tasks in the background accurately and on schedule.

In Conclusion

Payroll compliance may sound complex at first, especially for small business owners who wear multiple hats. But with the right understanding and systems in place, it becomes a manageable and empowering part of your business operations. When you comply with payroll laws, you protect your company from legal trouble, build trust with your team, and position your brand for real growth.

You don’t need a large HR team or an expensive accountant to stay compliant. Softwares like BizEdge offer simple, affordable payroll solutions that calculate deductions, generate payslips, track remittances, and keep records so you can focus on growing your business with peace of mind.

Ready to simplify your payroll and stay compliant? Book a free demo with BizEdge today.