AVOID THESE COMMON PAYROLL MISTAKES IN YOUR SMALL BUSINESS

       Good employees are a critical asset for any business. That’s why it’s important to embrace a payroll process that pays them consistently and accurately while avoiding errors. Payroll mistakes are stressful for employees and can cause disruptions during tax season.

Whether you’re considering hiring your first employee or already employing one, this blog will guide you through common payroll mistakes and strategies for preventing them before they start!

Top payroll mistakes you’ll want to avoid

        Employee compensation can be challenging for any small business owner, and discovering a payroll discrepancy can be discouraging. Depending on the type and severity of your payroll mistakes, you should ask questions such as:

How can I resolve a payroll discrepancy?

How long does an employer have to fix a payroll error?

What are the consequences of payroll errors?

Here are some common payroll mistakes and tips for avoiding them.

Employee Misclassification

       Understanding which classification to use during the hiring process is essential – employee or independent contractor. A significant difference between these classifications is the type of tax form they’ll file for the wages you pay. An independent contractor should receive a 1099 tax form, while an employee will receive a Form W-2.

You can be liable for taxes if you are misclassifying employees. The IRS provides guidance through common law rules if you need assistance classifying a worker. These rules consider the worker’s behavior, finances, and type of relationship with your business.

Misunderstanding exempt and non-exempt

       You’ll also need to confirm the status of exempt or non-exempt. This exemption status refers to the federal Fair Labor Standards Act (FLSA), which sets minimum wage and overtime pay requirements. This means you must pay overtime and a minimum wage to non-exempt employees. For more information on who should be exempt from the FLSA, reference the Department of Labor Fact Sheet.

Violating the FLSA can lead to hefty fines, regulatory action, and even lawsuits from your employees, so it’s essential to grasp the difference between the categories.

Disorganized records

       Maintaining organized business records ensures you can quickly locate documents when needed. Saving your documents in different locations and using inconsistent file names wastes time and causes inefficiencies. This is especially true for payroll records, including pay stubs and tax forms.

A simple way to avoid this mistake is to ensure an efficient organizational strategy. Keeping an organized database of employee documents can help prevent payroll issues and keep your business running smoothly.

Forgetting about remote employees

       The number of remote employees has drastically increased over the past few years, creating challenges for remote payroll and taxes. Proper incorporation is one of those issues. You must ensure that you incorporate your business in the state where your remote employee works.

The consequences of this payroll error will likely depend on local laws and regulations. Avoid this issue by always knowing where your remote employees work by requesting relevant tax forms with their addresses. If your remote employees are moving around and working in different states, this may require additional incorporations in those states.

Mistake on paycheck

       A paycheck contains details such as pay rate, number of hours worked, sick leave, etc., which can regularly change, potentially impacting the total amount per pay period.

Making a mistake on a single paycheck might not lead to disaster, but it’s important to always strive for accuracy. There are several ways to make payroll more efficient to reduce the risk of errors, and one of the best strategies is outsourcing the task to a payroll professional.

Inconsistent pay periods

       Pay periods will vary depending on your business’s location, but it’s a good idea to designate a regular payday so your employees know what to expect. Most business owners will choose weekly or bi-weekly pay periods, though the exact payday doesn’t necessarily have to fall on the same date. For example, some paydays will inevitably occur on weekends or holidays, so you might need to adjust by a day or two.

Processing payroll sporadically throughout the month will create sloppy records and unhappy employees. You may also need to comply with specific regulations.

Not using direct deposit

      Some employees and small business owners may still prefer a hard copy of their paychecks. While direct deposit is a more convenient and secure payroll method, the decision is ultimately up to the employee. You cannot mandate that paychecks be distributed through direct deposit, but this is still the preferred method when possible.

Not using direct deposit can lead to payroll discrepancies, especially if the check is handwritten. Human error is always a risk with any manual activity, so embracing automation is advised to ensure consistency.

Processing payroll late

       Mistakes and disruptions to payroll can be stressful and impact employee morale, especially if you process payroll late. Processing payroll is a tedious, hours-long task, and if you’re late, it could damage your relationship with employees and invite scrutiny from governmental authorities in egregious circumstances.

If you process payroll late, the first thing you should do is correct that mistake. If it’s an ongoing issue, develop processes to ensure your payroll duties are addressed accurately and on time. For some busy owners, that isn’t possible, so they outsource payroll duties to professionals, saving them time and avoiding potential clashes.

Misprocessing garnishments

       If an employee’s wages are garnished, you must withhold the proper amount owed per pay period. Failing to withhold garnished wages during the payroll process may result in penalties for your business and potentially complicate the matter between your employee and the debtor or plaintiff.

Ensure you always withhold garnishments by updating your internal payroll processes or consider outsourcing to a professional payroll service.

Miscalculating tax

       Your employee’s tax rate helps determine how much they take home. Calculating the correct tax rate is an important aspect of running payroll, especially since you are responsible for making up the difference in the event of a miscalculation. Miscalculations can occur for many reasons, especially when tax rates change from year to year.

Keep up with changes to the tax code to avoid miscalculating payroll due to a change in tax rate. You can do this by following relevant media outlets or periodically checking in with state and federal authorities. 

Miscalculating overtime

       If overtime hours are not logged correctly, they will likely lead to inaccurate overtime payments. Untangling these issues can be painful and takes time, and your employee may have to return overpaid wages as a result.

If improper logging is the main issue disrupting accurate overtime payments, create clear policies for employees to follow when it comes to overtime. That way, overtime miscalculations can be minimized or eliminated.

Failing to pay withheld taxes

       Your employees may make withholdings for a 401(k) plan, benefits, flexible health spending accounts, and more. Failing to pay withheld taxes can impact them during tax time, causing delays, reissues, and penalties.

Addressing the matter as soon as it comes to your attention will help calm your employees while materials are corrected. Creating processes in your payroll routine to avoid failing to pay withheld taxes will help avoid issues during subsequent tax seasons.

Overlooking holidays and time off

       Similar to miscalculating overtime, it is important that payments to your employees are processed accurately with holidays, paid time off, and sick leave accounted for. Failure to take this into account can lead to an underpayment or overpayment to employees and disruptions to your business.

Avoid overlooking holidays and time off by clearly communicating company policies to employees. Your payroll software might also have a time-tracking feature for the various leave policies, eliminating human error and future issues.

Failing to meet minimum wage requirements

       Minimum wage requirements tend to shift often, making it difficult to follow regulations laid out by state and regional authorities. If your payroll isn’t accurate, you might be responsible for hefty fees and back pay to impacted employees.

Employee attendance software can aid in tracking your workforce when they’re on the clock, which helps to calculate their pay rates accurately.

How to avoid payroll errors

      The best way to avoid payroll errors is prevention. Creating and implementing clear policies to ensure your employees have provided you with the accurate information you need to run payroll is a great place to start. Follow that up by addressing common issues with the payroll process.

If that isn’t possible or you find running payroll too tedious or complex, consider working with professional payroll specialists. 

FAQs about Common Payroll Mistakes

Can a dedicated payroll team make mistakes?

       It is possible that a payroll professional can make a mistake, but it isn’t probable. The possibility for errors is generally greater if an inexperienced person takes on the burden of payroll processing. Plus, a payroll professional can resolve the mistake much more quickly.

How do you overcome common payroll errors?

      If you’ve discovered some errors in your payroll, don’t panic. Partner with a professional who can advise you on what to do and help create a strategy to make your processes more efficient.

How long does an employer have to fix a payroll error?

      It’s best to immediately fix a payroll error for your business and the impacted employee. The Department of Labor generally looks back two years into a company’s records when the error involves an employee’s back pay.

Who bears liability in the event of a payroll error?

      Employers will typically bear the liability in the event of a payroll error. While correcting a single payroll error can be challenging, the difficulty increases as more errors are made.

What happens if payroll errors happen consistently?

      Your business might be able to absorb the consequences of a single payroll error, but dealing with numerous errors can become untenable. If that happens, you know it’s time to use a professional payroll service.

Let SHACO take care of your payroll needs

       Small business owners wear many hats for many reasons, so understandably, they might want to handle tedious and time-consuming payroll processing duties themselves. But as payroll errors pile up, any advantage of doing payroll themselves evaporates. When that happens, many small businesses turn to the payroll professionals at SHACO, America’s leading virtual accounting firm for small businesses.

Whether it’s payroll, tax advisory, entity formation, or any of our professional accounting services, we have the affordable pricing solutions you need to help your business stay compliant. Schedule a quick consultation – usually 30 minutes or less – to learn more.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. SHACO assumes no liability for actions taken in reliance upon the information contained herein.