As a small business owner, paying your employees is one of your main responsibilities. If you don’t do it correctly, you risk alienating your employees, and you can also incur hefty fines and penalties. Establishing an accurate and efficient payroll process will save your staff — and yourself — some major headaches.
Here are some small business payroll mistakes to avoid as you get your payroll system off the ground.
1. Doing It All Yourself
Small businesses are busy, and that can mean wearing many hats on a daily basis. Business owners who handle all the payroll themselves are forced to spend less time building their business. And delegating payroll to other employees can often eat up much of their bandwidth. Outsourcing small business payroll via a reliable payroll service can save countless hours each month.
When you find a service that manages direct deposits, tax automation and employee self-service, you’ll be in much better shape. All your team has to do is manage approvals and keep an eye on the bottom line.
The best payroll services will also help you stay in compliance with changing tax and payroll laws (more on this later!). You’ll even be able to keep convenient digital records and prepare for tax season more easily.
2. Not Double-Checking Details
The payroll details need to be accurate for your employees to get paid on time. It’s worth double-checking that all employee information is correct before sending off the paychecks. Ensure that the payment amounts and identifying information match your records. Under or overpaying employees can be a hassle to fix, so you’ll want to get it right from the start.
3. Paying Workers Late
Your employees expect to be paid on a schedule. Many of them rely on regular paychecks to pay their bills and support their families. If late payroll becomes a habit, your staff will become increasingly frustrated — and may jump ship. So you need to make sure that you send out your payroll exactly when you say you will.
This is one of the main areas where payroll services can help. You can automate your payroll, so it goes out when it’s supposed to.
4. Misclassifying Your Workers
When running your payroll, it’s important to categorize employees and contractors correctly. Assigning the proper classifications to each worker determines whether you withhold payroll taxes from their paycheck. However, these classifications can get confusing.
According to the IRS, the employee versus contractor designation comes down to a few key factors: behavioral control, financial control, and relationships. Take the time to review these categories when determining a worker’s classification. It’s worth asking your certified public accountant (CPA) to weigh in to make sure you get this right. Then make sure you pay each worker according to their status.
5. Making Tax Errors
Mislabeling your employees and contractors isn’t the only tax mistake you can make. There are a number of tax errors that can mean trouble for your business. When you determine that you need to withhold payroll taxes, you also need to calculate how much. Miscalculating withholding amounts or failing to pay payroll taxes at all can lead to hefty fees.
You also want to ensure that you’re paying state unemployment taxes regularly and correctly. Again, outsourcing your payroll can help you avoid any tax errors and pay accurate rates. The rates for Social Security and Medicare, income, and unemployment taxes are liable to change.
6. Not Accounting for Holidays
When calculating paychecks for a certain pay period, remember to include paid holidays. Forgetting to include these hours means your workers’ paychecks will come up short. Plus, you’d have to take the time to correct the error afterward.
You also want to take holidays into account when planning your payroll. A bank holiday can delay a paycheck by a day or two, so be sure to inform your employees. Otherwise, you could be dealing with a flurry of emails when the direct deposits don’t show up.
7. Miscalculating Overtime
Under federal law, employers need to pay hourly (and some salaried) employees at least time and one-half for overtime. Be sure to double-check whether any employees worked overtime when running your payroll. Otherwise, you risk miscalculating this time and cutting employee paychecks.
Business owners should also ensure that employees who are eligible for overtime are accurately tracking their time worked. Having them punch in and out or building the time clock into their computers, can be an efficient way to do so. Be aware that the Fair Labor Standards Act (FLSA) requires employers to keep thorough records on employee pay, including overtime earnings.
8. Keeping Disorganized Records
Speaking of thorough records, some small businesses fall short in this area. Maintaining organized payroll records is essential, even if you’re using a payroll service. Businesses should have digital copies of all paystubs. This way, you have records to reference during routine bookkeeping, a payroll dispute, or a tax audit.
As noted, there are federal and state laws that require businesses to keep payroll records. The specific amount of time you must retain each record depends on the agency. For example, the IRS requires businesses to keep benefits documents and payroll forms for at least four years. The Department of Labor asks for three years of pay records.
These are simply the minimum requirements as mandated by law. It won’t hurt to keep the records on file longer.
9. Not Staying Up-to-Date on Payroll Laws
When you have an endless to-do list, payroll compliance isn’t always top of mind. However, business owners need to keep up with the most recent payroll and labor laws. These regulations dictate things like the minimum wage, family leave requirements, and tax rates. If you aren’t keeping up with these changes, you could be making mistakes without realizing it.
One of the best ways to keep up with laws and regulations is to have the right professionals on your side. Again, you can use a payroll service to avoid missteps, or you could hire a CPA to review your payroll practices. They will help you stay ahead of the curve and avoid big mistakes.
Payroll may be a not-so-exciting part of doing business. However, your employees keep your business running. You’re supporting your team by paying them fairly and on time. While there may be hiccups at the start, relying on payroll professionals and services will help keep you on track.