Payroll is one of the most critical functions of any small business. Ensuring employees are paid accurately and on time keeps morale high and helps businesses maintain compliance with labor laws. However, many small businesses encounter payroll mistakes that can lead to costly penalties, unhappy employees, and legal troubles. To help you avoid these pitfalls, we’ve compiled a list of the most common payroll mistakes and how to prevent them.
1. Misclassifying Employees
One of the biggest payroll mistakes small businesses make is misclassifying employees as either independent contractors or full-time employees. The IRS has strict guidelines regarding employee classification, and misclassifying workers can result in significant fines and back taxes.
How to Avoid It: Review IRS guidelines on worker classification and consult a payroll services provider or accountant to ensure your employees are properly categorized. Independent contractors should have clear contracts outlining their roles and responsibilities to differentiate them from employees.
2. Failing to Track Employee Hours Accurately
For businesses with hourly employees, incorrect tracking of work hours can lead to overpayments, underpayments, and compliance issues with overtime laws.
How to Avoid It: Use a reliable time-tracking system to log employee hours accurately. Automated payroll services with built-in time-tracking features can help reduce errors and ensure compliance with wage and hour laws.
3. Missing Payroll Tax Deadlines
Small businesses are required to withhold and submit payroll taxes on time. Missing deadlines can lead to penalties and interest charges from the IRS and state tax agencies.
How to Avoid It: Set up automated reminders for tax deadlines or work with a payroll service provider that handles tax filings on your behalf. This ensures payroll taxes are calculated correctly and submitted on time.
4. Not Keeping Up with Payroll Regulations
Payroll laws change frequently, and failure to stay updated can lead to compliance violations. Wage laws, tax rates, and overtime regulations are just a few areas that may change year to year.
How to Avoid It: Stay informed about federal, state, and local payroll regulations by subscribing to payroll compliance updates or partnering with a payroll service provider that stays current with tax laws.
5. Miscalculating Overtime Pay
The Fair Labor Standards Act (FLSA) requires that non-exempt employees receive overtime pay at a rate of at least 1.5 times their regular hourly wage for any hours worked over 40 in a workweek. Miscalculating overtime can lead to wage disputes and legal penalties.
How to Avoid It: Use payroll software that automatically calculates overtime pay or consult with a payroll expert to ensure your calculations comply with labor laws.
6. Forgetting to Keep Payroll Records
The IRS and Department of Labor require businesses to maintain payroll records for a specified period. Losing or failing to maintain payroll records can make it difficult to resolve disputes or comply with audits.
How to Avoid It: Keep detailed payroll records, including employee wage information, timecards, tax filings, and pay stubs, for at least three to seven years. Cloud-based payroll services can help store and organize these records securely.
7. Incorrectly Handling Final Paychecks
When an employee leaves a company, whether voluntarily or involuntarily, employers must follow state laws regarding final paychecks. Failure to issue a final paycheck on time can lead to penalties.
How to Avoid It: Review state laws on final paycheck requirements and ensure your payroll process accommodates quick and accurate final payments.
Conclusion
Avoiding these common payroll mistakes can save your small business time, money, and legal headaches. By leveraging professional payroll services, staying informed about payroll regulations, and using reliable payroll software, small business owners can streamline payroll processes and ensure compliance. If you need assistance with payroll management, Payroll Complete offers expert payroll services tailored to small businesses. Contact us today and visit the links below to learn how to simplify your payroll.
The Hidden Costs of Payroll Errors and How to Avoid Them
How Payroll Service Providers Handle Complex Payroll Scenarios