When you become an employer, you’re bound to make a few mistakes along the way. Heck, I know I’ve made one or two (or three or four…). Some mistakes (like payroll ones) are more costly than others. But hey, mistakes happen—and I’m here to help you avoid payroll blunders by teaching you a thing or two about what I’ve learned along the way as a business owner and CEO of a successful accounting and payroll software company.
Payroll Mistakes To Avoid
New to running payroll? Been handling payroll processing for years? Regardless of your experience, payroll mistakes can happen to the best of us. But, steering clear of said blunders is easy if you know what to watch out for. Without further ado, here are eight payroll mistakes to avoid at all costs.
1. Misclassifying Employees
Part of your role as “employer” is determining if a worker is a contractor (1099) or employee (W-2). And if you misclassify employees, you could wind up with a lot of issues down the road (like penalties and interest for unpaid taxes—big yikes).
To ensure you classify employees correctly and avoid mixing up the two, learn the difference between employee vs. contractor. Here’s a brief rundown of each to get you started:
Employee: Someone you hire and pay wages to.
- Works for the employer, who controls their work
- Subject to FLSA requirements (e.g., minimum wage and overtime)
- Has employment taxes withheld from their checks
- Fills out new hire paperwork, like Form W-4
- Receives Form W-2 at year-end
Independent contractor: An individual who may run their own business but also performs work for other businesses.
- Controls when and where they work (and uses their own equipment and supplies)
- Not subject to FLSA requirements (e.g., minimum wage and overtime)
- Does not have employment taxes withheld from their paychecks
- Fills out Form W-9
- Receives Form 1099-NEC at year-end
To determine if a worker is an employee or contractor, you can ask yourself questions like:
- Do I control or have the right to control what the worker does and how the worker does their job?
- Are there any written contracts?
- Do you control the business aspects of the worker’s job? (e.g., how the worker is paid)
Not quite sure how to classify a worker? No worries—I know how difficult it can be, especially when you have a million other things on your plate. Our guide on the difference between independent contractors and employees goes over the distinction in detail, provides resources, and more.
2. Not Knowing The Difference Between Exempt Vs. Nonexempt
Employees can be one of two things: Exempt or nonexempt. But, one big mistake employers make is not knowing the difference between the two statuses and classifying employees incorrectly.
To steer clear of this common payroll mistake, get to know the difference between exempt vs. nonexempt workers. Exempt employees are not protected by The Fair Labor Standards Act (FLSA) and cannot receive overtime wages. On the other hand, nonexempt employees can receive overtime pay and are covered under the FLSA.
To be nonexempt, an employee must meet at least one of the following:
- Receives hourly wages
- Earns below the exempt threshold of $35,568 annually (or $684 per week)
- Does not have executive, administrative, or professional job duties
So before you go and classify an employee, take a look at their wages and duties. It may just save you some money in penalties and fines (and a whole lot of regret).
3. Using Incorrect Tax Rates
I hate to break it to you if you didn’t already know, but some tax rates can change from year to year. And if they change and you don’t realize it, that’s where a payroll blunder can come into play.
When you calculate and pay the wrong tax rate, you must make up the difference. And, (you probably guessed it!) you might also have to pay late fees, penalties, or interest on said taxes.
To avoid making this big blunder and shelling out extra cash, be aware of which taxes you may need to update rates for:
- Federal income tax
- FICA tax (although unlikely, it’s always a possibility—plus watch out for that ever-changing Social Security wage base!)
- Federal unemployment tax (FUTA)
- State income tax
- State unemployment tax (SUTA)
- Local income tax
Keep an eye on your inbox or mailbox for notifications about rate changes. For some extra peace of mind, you can also contact your state and local governments to check on rates or do a quick Google search. After all, it’s better to be safe than sorry. And for complete peace of mind, go ahead and use reliable cloud payroll that automatically updates tax changes.
4. Missing Payroll-related Deadlines
When it comes to running payroll, you take on the role of being a deadline tracker. If you don’t track due dates for running payroll and paying employment taxes, you could wind up in deep water with your employees and the government (and nobody wants either of those, am I right?).
To ensure you always pay your employees on time as well as file and remit your taxes by their due dates, you can:
- Make sure you are organized
- Set reminders to run payroll or remit taxes
- Get into a routine (e.g., run payroll at 10 a.m. every Monday)
- Mark your calendar with due dates
- Use full-service payroll software
The more you do to avoid missing deadlines, the better off you’ll be. If you forget to run payroll on time, own up to your mistake, pay your employees ASAP, and take the necessary steps to avoid making the same mistake in the future. If filing and paying employment taxes on time slips your mind, don’t panic. Instead, contact the tax agency to find out what you need to do to get your ducks in a row.
5. Miscalculating Employees’ Pay
Picture this: You go through the motions of calculating your employees’ pay. You cut the checks, and bam! Your employees come to you and say their paychecks aren’t accurate. Sounds like a nightmare, right?
Sure, miscalculating your employees’ pay sounds like a nightmare. But, it’s a reality for many business owners out there. To avoid this major mistake and ensure your calculations are accurate, you can:
- Double-check tax rates (think back to Blunder #3)
- Make sure you’re calculating overtime pay accurately
- Use payroll software for accurate calculations
- Brush up on how to calculate net pay
- Know how deductions work
- Triple check your calculations if you’re doing payroll by hand
Miscalculations can be easy if you do all of the calculations yourself. If you really want to avoid any payroll errors when it comes to calculations, consider teaming up with a payroll company. That way, you can just plug in the hours, and the software will handle the calculations for you (hello, free time).
6. Forgetting To Send Out Tax Forms
Year-end is hectic as heck for many business owners (including myself). And with all of the hecticness, it can be easy to get caught up in other tasks and forget to send out tax forms (e.g., Form W-2) to your team.
Copies of Form W-2 must be sent out to your employees and other parties (e.g., Social Security Administration and state or city) by January 31 each year. If you miss the deadline, you could face some pretty hefty penalties.
To steer clear of forgetting to send out tax forms at year-end, you can set reminders, mark your calendar, or use a payroll service that does it for you. And if you really want to go the extra mile to ensure you don’t forget, start the year-end preparation process ahead of time. That way, you’re not scrambling to get things done at the end of the year.
7. Not Keeping In-Depth Payroll Records
Part of your duties as an employer is keeping records of important documents. And yep—this includes payroll records. But failing to keep in-depth payroll records is a mistake some business owners make around the world. And, not doing so can certainly bite you in the butt come tax time or during an audit.
Payroll records include the following:
- Withholding forms
- Payroll taxes
- Benefits and deductions
- Hours worked
- Time off info
- Gross wages
- Pay rate details
To avoid any issues, make sure you have a solid strategy in place for organizing your records (e.g., filing cabinet). Also, brush up on how long to keep payroll records for (hint: it can vary, but you’ll want to hold onto the majority of your payroll records for at least three years).
8. Having A Poor Payroll Process
What does your payroll process currently look like? Do you scramble at the last minute every pay period to find the info you need to run payroll? Are you wasting time computing each employee’s pay by hand? If so, you may be making a mistake and it may be time to reevaluate your payroll process.
To simplify your payroll process and avoid all of the above mistakes (and more), consider your options. To help with calculations and taxes and keep up with ever-changing tax laws and rates, you may find it easier to use payroll software. You can also outsource your payroll to an accountant to handle everything for you.
Whatever you decide to do, make sure you have a solid plan in place when running payroll to ensure you can avoid as many mistakes as possible.