How to Avoid Common Payroll Mistakes in Your Small Business

There’s a common misconception that payroll is complicated and difficult to manage. However, there are some simple steps you can take before your business takes on the task of paying its employees so it doesn’t have to deal with the headache later.

The “payroll companies” is a company that helps businesses with their payroll. They have created this article to help you avoid common mistakes in your small business.

Payroll is one of the most underappreciated yet crucial tasks in a company. 

Payroll, when done correctly, may assist your company avoid legal repercussions while also keeping your workers happy. When done properly, however, payroll errors spread across the business and may be expensive to rectify, both in terms of time and money.

On the plus side, the majority of frequent payroll errors are simple to navigate, correct, or prevent with good preparation. Let’s look at why rectifying these 10 frequent payroll problems, such as misclassifying workers and underpaying employees, is so essential. 

Why should you make the following payroll adjustments?

Payroll is required for all companies with workers, although it may imply various things for different firms. Payroll, for example, may refer to:

  • The workers you pay, as well as their personal information.
  • Each pay period, the amount paid to workers.
  • Calculating and distributing taxes and salaries is the procedure.

An employer must obey the payroll laws of the state in which they operate while running a payroll program. For example, under California law, workers in firms with more than 26 employees must be paid $14.00 per hour, while those with 25 or less must be paid $13.00 per hour.

Employee satisfaction is important. 

Employees will be frustrated and worried if their company pays them the wrong amount, is late with payments, or improperly deducts taxes. Unsatisfied employees are always concerned about whether their payment will be delivered on time or in the right amount.

During tax season, an employee must pay for underestimated taxes out of pocket, and the employer must do the same with additional penalties. Employees that are dissatisfied will not work hard to impress you, will quit your startup in droves, and will post negative evaluations.

Penalties and incarceration may be imposed.

If a company pays a worker $13.00 per hour and has more than 26 workers, the company may be fined or possibly imprisoned. Employees would also have the right to sue their company, potentially jeopardizing their livelihood, reputation, and personal money. 

Willful offenders of wage theft, which is the denial of pay due to an employee, face penalties of up to $10,000 for the first offense and imprisonment for subsequent offenses. Because ignorance of the law is seldom used in court as a justification to break the law, it’s usual for a judge to find wage theft as “willful.”

Because of these two factors, all small companies must comply with federal payroll rules as well as state-specific tax laws, or risk serious penalties.

How to avoid these 10 typical payroll mistakes when starting a business

With a complex process like payroll, there are many areas where a company may make catastrophic mistakes. Let’s take a look at the top ten payroll errors your business should avoid at all costs.

1. Workers being misclassified as independent contractors

Employees are protected and given benefits by the Fair Labor Standards Act, such as minimum wage and overtime compensation (W-2 form). These safeguards do not apply to independent contractors (1099), since the companies that hire them do not pay a part of their taxes.

Misclassifying people as independent contractors rather than employees lowers labor expenses (by up to 30% in certain cases), but it is unjust to both employees and other firms, and may result in a large punishment. Employees will lose essential salaries and benefits, but the government will lose vital tax money, resulting in overpayment or underpayment.

2. Misclassifying employees as exempt or non-exempt.

Exempt workers are not eligible to overtime compensation and are required to complete their work in the time allotted, regardless of how long it takes. If they execute particular (relatively high-level) job responsibilities, are paid on a salary basis, and earn at least $23,660 per year, they are exempt. 

When a non-exempt employee is regarded as an exempt employee, they are denied overtime or hourly pay, resulting in wage theft. As a result, most non-exempt workers should be paid hourly unless they choose to be paid a salary (which is common for high-ranking jobs).

3. Failure to pay the proper overtime pay

If non-exempt employees work more than 40 hours per week, they must be paid time and a half. On California, for example, employees must be paid overtime if they work more than eight hours in a day, even if they don’t work more than 40 hours a week.

Unless they are exempt from overtime under the State Labor Code or if an enforceable or existing order (such as welfare or child support) restricts the employee’s hours, pay, or working conditions, non-exempt salaried workers may be entitled to overtime. Employers may utilize a clock-in/time management system to guarantee that employee hours are properly recorded.

4. Deciding on the incorrect payroll service provider

It’s critical to choose a payroll service provider that meets your company’s requirements. As your business develops, you may need to transfer providers. When selecting a payroll firm, make sure they can offer high-quality payroll services, such as the ones listed below:

  • Payroll Processing: Automates the most time-consuming elements of payroll processing, such as tax withholding, computations, and payment choices, such as digital or physical checks.
  • Calculate, Withhold, and Pay Taxes: Eliminates errors in tax calculation and payment, including the most costly and frequent errors, such as working overtime.
  • Compliance: Assigns the appropriate paperwork, such as the W-2, 941, 1099, and W-9, to the appropriate workers. Payroll service providers will make certain that this information is correct and up to date.
  • New-Hire Reporting: New-hire reporting deadlines are tight, particularly when it comes to calculating enforced or existing orders. Reports shall be sent to the appropriate agency on time. 
  • PTO-Management: Easily manages paid time off for workers, including parental and medical leave, vacation time, sick days, and personal days.

Employees should be able to access these services through a mobile app so that they may see a difference right away and take action before their next payday. 

5. Failure to maintain payroll records for a long enough period of time

Payroll is often thrown away or filed improperly by start-ups or new companies, making it difficult to locate. However, doing so may expose your company to penalties for not maintaining records long enough to provide evidence of properly calculated wages.

Payroll records should be kept for at least three years, but many experts advise retaining them for four. Because the IRS may discover a mismatch later, it’s preferable to maintain records for longer than the legal minimum. The IRS may discover a payroll mistake at any moment, and it’s up to the company to prove it. A fine may be imposed if the business does not comply.

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6. Having just one person with payroll software training.

Your employees may fall sick at any moment, causing them to miss key tax deadlines or payroll filings. It’s critical to have a backup person (or individuals) who can handle payroll effectively if the regular employee is ill and unable to do so. Having a backup plan will guarantee that a company remains lawful and that its employees do not develop animosity as a result of a missing or underestimated payment. 

7. Failure to preserve confidentiality

Except for the payroll department and the senior management team, no payroll information should be shared. This implies that documents must be handled with care – payroll information, for example, should not be left on a printer (or visible on a computer display) in a common area of the workplace. Having papers out in the open may have a negative impact on your image with customers and workers.

To preserve employee confidentiality, store your payroll records in a locked cabinet or a password-protected/encrypted file that only authorized employees may access. Remote workers may access password-protected encrypted data or software that uses the Advanced Encryption Standard (AES), which provides a high degree of protection and optimization.

8. Employees that are overpaid or underpaid

An employee may be overpaid or underpaid as a result of a simple data input error. If an employee is underpaid, you will be hit with a large bill when it is found and you must reimburse them. It may be difficult (and upsetting) to get your money back if an employee has been overpaid. To prevent this scenario, it’s essential to double- and triple-check your work.

9. Failure to meet a tax deadline

Payroll taxes must be paid by specified dates, and failure to do so may result in significant late fees or penalties. As a result, it’s critical to be aware of deadlines and begin making tax payments well in advance of the due date. The following dates are when you must submit your income tax returns:

  1. April 15 is the default calendar year-end deadline for companies.
  2. June 15 is the default date for international companies to conclude their fiscal year.
  3. The deadline has been extended from April 15 to October 15.
  4. The deadline has been extended from June 15 to December 15.

If your company revenue reaches a certain level, you may require longer time to file or you may need to file more often, depending on your circumstances. If you don’t do your homework before filling out your IRS forms, you may end up paying fines even if you file on time. 

Paying your workers late is number ten.

Paying your workers late is a costly payroll blunder since it exposes you to possible legal action and causes concern among your staff. It may put them in serious financial straits – and it could also convey the impression that your business is experiencing financial difficulties, causing workers to dread layoffs. Never put your workers in a threatening position.

Use a to-do list or other task delegation tools, such as Asana, to keep your payroll team on track and guarantee your workers are paid on time. You may also utilize a hands-off method that automates payments or sends paychecks to an employee’s bank account.

Keep your workers pleased while being compliant with the law. 

It’s critical to stay on top of payroll and the problems that come with it. If you do this incorrectly, your company may suffer severe repercussions. You don’t want to end up with a lawsuit or dissatisfied workers who are concerned about their employment. So, to effectively grow your company, take action now by avoiding the 10 most frequent payroll errors.

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Frequently Asked Questions

How do you overcome common payroll errors?

A: If a payroll error is discovered, immediately contact your accounting department and ask for their help in correcting the issue. Sometimes there are errors that only they can fix.

How do small businesses keep track of payroll?

A: There are a number of ways small businesses can keep track of their payroll. However, the way in which this is done differs from company to company.

What can go wrong with payroll?


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