Accounting & Finance
4 Common Payroll Mistakes (And How to Fix Them)
Small businesses make a lot of mistakes when trying to grow their business and build a foundation for success. But, payroll mistakes can be some of the costliest mistakes that a company will ever make.
Fines can occur, money can be misappropriated and a business can lose credibility when payroll mistakes happen.
1. Classification Issues with Workers
Classifying workers is a big issue for small businesses. Workers may even be exempt, but a wrong classification can lead to expensive issues for a company. Independent contractors are not employees, and this is a major issue for a lot of small businesses.
A quick fix when classifying an employee that you don’t know how to classify is to file a Form SS-8.
What this form does is ask the IRS how to classify an employee. If you fail to classify a worker properly, your business will be required to pay:
- Back wages to the employee as required
- Employer’s taxes
- Employee taxes
Exempt workers aren’t required to be paid overtime, but nonexempt workers will be required to be paid beyond 40 hours per week. A general rule of thumb is that an employee is exempt when they fall within the Fair Labor Standards Act guidelines.
2. Improper Tax Rates
Small businesses often apply the wrong tax rates, which is a major issue when a small business is doing its own payroll. Rates change often, and this is a main reason why payroll for small businesses is best left to the professionals.
Owners will need to make sure that the rates are appropriate for:
- Local income tax
- Social security
- Federal income tax
- State income tax
- Federal unemployment
- State unemployment
Keeping up on all of these taxes is difficult for a small business, and if taxes are not paid properly, this can lead to fines, penalties and having to pay back taxes.
A quick fix is to use a professional payroll service to take care of all of a business’s tax rates.
3. Late Payments
Payroll needs to be made on time, when payroll is late, this leads to a team that has lost morale and the will to work. Employers need to have a good reputation if they want to increase employee retention and reduce turnover.
Late payments often occur when:
- Employees are fired
- Employees leave the business
- Payroll duties wait until the last minute
Late payments are often a result of a business owner, whom is conducting all of the payroll duties on their own, being too overwhelmed. A dedicated employee that deals with payroll or a professional service can ensure that late payments are kept to a minimum.
4. Inaccurate Payments
Employees want to be paid, and they want to be paid properly. Oftentimes, underpayments occur, but there are also times when an overpayment will occur. This may relate to improper overtime payment calculations, or this can occur when a rush in payroll occurs.
Frequent mistakes can lead to employees becoming demotivated.
Fines relating to labor law violations can occur when these inaccuracies are frequent. Error-checking payroll to ensure everything is calculated properly can help reduce the number of inaccurate payments.
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