Payroll management can be complex, and businesses often make mistakes that can lead to financial and legal issues. It’s important for businesses to invest time and resources into proper payroll management, stay updated on relevant regulations, and seek professional assistance if needed to avoid these common mistakes.
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 problems for a company. Independent contractors are not employees, a significant issue for many small businesses.
A quick fix when classifying an employee you don’t know how to organize is filing a Form SS-8.
What this form does is ask the IRS how to classify an employee. If you fail to classify a worker correctly, your business will be required to pay the following:
- 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 needed to be paid beyond 40 hours per week. A general rule of thumb is that employees are 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 significant issue when a small business does its payroll. Rates change frequently, which is why payroll for small businesses is best left to the professionals.
Owners will need to make sure that the rates are appropriate for the following:
- Local income tax
- Social security
- Federal income tax
- State income tax
- Federal unemployment
- State unemployment
Keeping up on all 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 using a professional payroll service to take care 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, who 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 adequately paid. Often, underpayments occur, but there are also times when an overpayment will occur. This may relate to improper overtime payment calculations, or this can happen 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 correctly can help reduce the number of inaccurate payments.
More Payroll Errors To Avoid
There are many more errors your business needs to avoid managing payroll.
Have you experienced the following payroll errors?
Ignoring State and Local Payroll Regulations
Payroll compliance goes beyond federal laws. Businesses must also be aware of and comply with state and local payroll regulations, including minimum wage laws, overtime requirements, and tax obligations specific to their jurisdiction.
Failure to Account for Benefits
Neglecting to account for employee benefits, such as health insurance, retirement plans, or flexible spending accounts, can result in inaccurate tax withholding and reporting. Employers must ensure that they accurately calculate and report these benefits.
Inadequate record-keeping of payroll-related documents, including timesheets, pay stubs, tax forms, and employment contracts, can cause problems during audits or legal disputes. Maintaining organized and accurate records is essential.
Two more payroll errors that can make or break your business are lack of communication and not seeking professional help.
Failing to communicate with employees about payroll-related matters, such as changes in pay rates or pay dates, can lead to dissatisfaction and decreased employee morale. Transparent communication is important for maintaining trust.
Attempting to manage payroll without adequate knowledge or expertise can increase the likelihood of errors. Businesses may benefit from consulting with payroll professionals or outsourcing payroll management to ensure accuracy and compliance.