Sections of this topic
Payroll mistakes can leave a black mark on an otherwise exemplary company profile. Failure to comply with federal, state, or local rules can lead to crippling fees or job applicants looking beyond your business to one more accountable. This article covers 12 common payroll mistakes and the tools you need to avoid them.
1. Being Infrequent With Payments
Your employees rely on their paychecks as much as you rely on their services to make your business succeed. For some, it’s crucial to have a stable source of income at set times of the month to make ends meet. These individuals may not have the luxury of being able to wait an extra day or more for you to wrap your head around the week’s payroll.
If you commit to paying your team weekly or bi-weekly at hire, it’s wise to honor such an agreement. While there are no federal laws surrounding how often to pay employees, some states have frequency requirements and could penalize your business for missing them. Your staff can also lose trust in you, resulting in a high turnover or the inability to bring new workers abroad.
Solution: Set Up Auto Payroll
Choose one of the best payroll apps to help you prevent this payroll mistake by automatically paying employees at set intervals. These platforms can save salaries, hourly rates, and even log hours. It still may require a little work on your end to make sure everything is correct, but you’ll receive reminders to do so.
2. Miscalculating Payroll Amounts
Accounting inaccuracies can lead to under or overpaying employee wages for the work they perform. These mistakes can go unnoticed, leading to financial issues down the road. Even if you catch them, it’s time-consuming to fix the problem.
In the case of the former, you’ll need to remedy the situation by compensating the worker for the amount you owe them. Depending on when you discover the discrepancy, this can lead to an expensive billing cycle that you didn’t plan for.
On the other side of the coin, there’s no joy in having to wrestle money back from an employee whom you overpaid. Federal and state laws allow you to reclaim the money, but it can be a challenging (and hurtful) process. Some state laws do have restrictions on how this process works, adding to the confusion.
Solution: Let a Program Calculate Totals for You
To help alleviate this issue, build an employee database in a payroll software, such as Gusto, with salaries and hourly wages. You can use the platform to pay out a salaried rate every pay period and calculate totals for hourly employees by simply having your team log their hours.
3. Miscalculating Hours or Overtime Amounts
Salaried employees are pretty straightforward, and you can usually send them the same check every pay period. Hourly employees, however, are not quite so simple.
First, there’s the matter of how many hours you’ve agreed upon for them to work per week. You probably won’t pay them to eat lunch, so you need to take that time into account when calculating wages. If they end up working beyond 40 hours, it’s essential to follow your state’s guidelines for overtime and pay accordingly.
Failure to track an employee’s hours and distinguish overtime can be a severe issue. In fact, it’s illegal not to pay workers for any overtime they’re due.
Solution: Digitally Track Employee Hours
Like physical timecards of old, digital replacements offer a means for employees to clock their own hours by signing in and out online. They can use the system to record breaks for lunch and will make it easy to note how many hours beyond 40 an individual works per week. The digital record is a failsafe in case of an issue and makes it a breeze to pay hourly employees their keep.
4. Listing Employees Mistakenly As Exempt or Non-Exempt
Listing an employee as exempt or non-exempt has a bearing on whether or not they are entitled to collect overtime pay. Paying a worker for overtime when they should be exempt is bad, but failing to pay a non-exempt employee for hours worked beyond 40 is much worse.
You’re required to reimburse non-exempt personnel for overtime hours worked, and you could get penalized for not doing so in the first place. This can also lead to trust issues with employees, even when the matter is unintentional.
Solution: Understand Fair Labor Standards Act (FLSA) Guidelines
Take the time to read all FLSA guidelines to avoid making these kinds of mistakes at any time during an employee’s time at your company. For this specific matter, an employee is only exempt if you pay them a minimum of $684 per week or $35,568 as a salary, and their job duties directly affect operations.
5. Incorrectly Identifying Employees and Contractors
As a business, you have a legal responsibility to declare who your employees are and who are independent contractors. Independent contractors are usually temporary workers, and you are not required to withhold any taxes for them. They are generally outside of a business’s benefits, such as vacation time and insurance.
Misclassifying an employee as an independent contractor will lead to a large amount of payroll and income taxes due that were not properly withheld. These taxes (and fees from the misclassification) can spell disaster for a company. Learn more on how to process payroll for contractors.
Solution: Have the Knowledge to Make the Right Decision Up Front
Both the Department of Labor and the Internal Revenue Service (IRS) have tests you can use to determine if your new hire should be classified as an employee or a contractor. If you’re still unsure, you can fill out an SS-8 form to have the IRS decide for you.
6. Forgetting to Account for Vacation Time or Holiday Pay
No states require employers to offer vacation time or holiday pay in any capacity. These incentives certainly go a long way on a job description and can help fill your empty seats.
This also means it’s up to you to assign and track hours for paid or unpaid vacations and any holiday pay you choose to reward your staff with. You may not reward all your employees the same way, and workers will take vacation at different times of the year. It becomes easy to overlook paid leave or incorrectly accrue paid time off.
Solution: Use Software for Tracking Rewards
The simple solution is to use a system that logs and tracks paid time off and holidays for you. It can also accommodate employees who accrue vacation days faster than others. Best of all, employees can request vacation days within the app, and it will automatically deduct time after your approval.
7. Overlooking Payroll Taxes
Each time payroll goes out, the government needs to collect taxes on those amounts. These taxes can come from the federal, state, and even the local level. To add to the confusion, your company may not be required to pay every tax. Failing to submit the proper taxes results in fines to your business.
Solution: Do Your Tax Homework
Take the time to understand all the tax laws that apply to your business. Be sure to travel from the federal level down to your local community so you don’t miss anything that could bite you later.
Keep in mind that this isn’t a one-time process, as payroll tax laws can change seemingly overnight. Even if you’re not in the know, you’re still responsible for paying the correct amounts at each government level. Some payroll apps can acquire this information for you after entering your city and state into the system.
8. Missing Tax Deadlines
You need to pay payroll taxes regularly, but the same holds true for income taxes. As a company, you must withhold an amount from your employee’s wages. Income taxes are typically due on April 15th every year for U.S. companies.
Employees use W-4 forms to decide how much they want withheld for income tax. It is your responsibility to correctly do so and get those funds to federal, state, and local officials in time. Since each employee withholds a different amount, the process quickly becomes confusing. One mistake can lead to penalties or fees from the government.
Solution: Hire a Tax Expert
It’s never a bad idea to bring in an accountant or tax professional to help you set up your system and calculate withholdings. It’s a time-consuming process that you’ll want to have someone focus on until you’ve ironed out all the kinks.
Beyond human help, some payroll software solutions can automate this process for you, sending out the correct payments to government agencies as needed.
9. Not Keeping Payroll Records
Not keeping a detailed payroll record for your business is a big no-no. The Fair Labor Standards Act (FLSA) requires companies to keep meticulous payroll records for three years before you can dispose of them. The IRS would like to be able to see tax information up to four years after filing.
Doing your entire payroll by hand can lead to multiple boxes of physical paper by the time those three years are up, especially if you have a larger staff. It can be a chore to dig through all that information to locate the one file you need to prove your case when a discrepancy arises.
Failing to provide this information when requested leads to headaches with the government and applicable fees and penalties.
Solution: Keep Your Records Digitally
Logging all your payroll information in a digital format reduces your reliance on paper and requires nothing more than a computer to store locally or cloud storage. It becomes easy to locate information in a pinch through search filters and sorting through specific timeframes.
Read: How To Conduct a Payroll Audit For Small Business in 8 Steps
10. Lacking Backup Records
You could lose all your payroll records in the event of a catastrophe in your place of business. Natural disasters leave little time to locate pertinent documents or computers that house this essential data. Disaster or not, you must have access to these records at any given time.
Solution: Back Up Your Files
You should always keep a backup of these documents or files off-site in the event something does happen to the originals. The simplest solution is to put the data on an external hard drive or use a cloud service to access them from anywhere.
11. Failing to Stay Up to Date With the Latest Laws and Regulations
Laws and regulations designed to protect your business and your employees change all the time. As new programs emerge, missing out on key details could leave you playing catch up with new requirements that can cause delays in processing or penalties for noncompliance. Missing a change to minimum wage, for instance, could leave you playing catch up with money you didn’t budget for.
Solution: Follow the Letter of the Law
Having an acute eye on updates to payroll regulations in your state can save you time and money. Being able to proactively make changes typically results in a smoother process than trying to recover down the road.
12. Training Too Few People on How to Use Payroll
Once you have your payroll system up and running, you want to make sure it keeps rolling smoothly along the tracks. You can’t always be bothered to run the numbers every time payroll is due, and many companies make the mistake of teaching just one other person how to handle such a monumental task.
Vacations and sickness creep in, and payroll can fall through the cracks if this person isn’t around to send everything out on payday. Even if someone else does step forward in a pinch, this can lead to payments not processing in time or costly mistakes with the data.
Solution: Train a Team of People
Think through worst-case scenarios, and then train a team of people how to do payroll, so they can handle all (or portions of) payroll when the need arises. Such a move can prevent issues that can lead to upset employees or loss of trust that can hurt work morale and performance.
Bottom Line on Payroll Mistakes
Staying up to date with all the rules and regulations surrounding payroll can be a daunting task. Payroll mistakes can be simple oversights, but still wreak havoc on budgets, employee satisfaction, and your company’s desirability as a place to work.
Fortunately, payroll software tools can help navigate a lot of these nuances for you. These services can automate payments, file taxes for you, and even alert you when a new regulation comes down the pipeline. No matter what, staying compliant is vital for having a fruitful business for years to come.
Noah is an American copywriter on a mission to help clarify the nuances of the business world through unique insights stemming from backgrounds in both engineering and the medical field. When not working, you’ll likely find him running or traveling.
