The 7 Biggest Payroll Mistakes a Small Business Can Make

Nothing breaks the trust between a small business owner and an employee like payroll mistakes. Your employees rely on fair and dependable payroll processing to support themselves and their families. If they can’t rely on you to hold up your end of the bargain, they’ll quickly start looking for someone who can.

Keep your employees happy and stay on the good side of the law by avoiding these common payroll mistakes:

1. Misclassifying Workers

The gig economy has turned freelancing into a full-time career for many, but not everyone who appears to be a freelancer qualifies as such in every case. The new California ABC test, for example, could change the classification of workers who previously operated as contractors. Before you begin working with someone new, establish clear parameters to ensure the relationship remains legally sound. Keep an eye on the news, and consult with a specialist if you aren’t sure whether changes in employment law apply to your situation.

2. Overlooking Overtime

New overtime rules for 2020 impact some exempt and hourly workers alike. According to the Department of Labor, hourly employees and salaried employees who earn less than $684 per week (equivalent to $35,568 per year for a full-year worker) must, in most cases, be paid overtime if they work more than 40 hours a week. Business owners, take note: If you have workers spending extra time in the office without appropriate pay, you could get in trouble — even if the overtime happened in the past. Make sure you classify employees appropriately as exempt or non-exempt, and when they work overtime, pay them the wages they earned. Not doing so would be far more expensive than simply paying them upfront. 

3. Underestimating Taxes

According to research from payroll software provider OnPay, nearly half of small business owners and managers handle all the finance and accounting work by themselves. OnPay also found that 28% of small business owners have been audited or received a notice from the IRS. With the risk of investigation high (and the penalties for mistakes even higher), don’t take chances with payroll taxes. Either use payroll tools that handle taxes automatically or consult with an expert to double-check your work.

4. Forgetting Garnishments

The larger your company grows, the more likely you’ll be to hire people who have their wages garnished by a third party. As the payroll provider, you’re responsible for ensuring those garnishments occur without issue. In most cases, the person garnishing the paycheck gets paid before the employee. You can’t fire an employee for a single-debt garnishment — only for multiples — so figure out how to make the process work to keep your business on the right side of the law.

5. Losing Records

If you still keep a filing cabinet of paper records for payroll, stop right now and find a digital payroll software alternative. Payroll recordkeeping requirements can vary dramatically in different jurisdictions. Fail to keep up with the proper timeline and detail, and you could end up in a lawsuit without evidence to defend yourself. Digital payroll records last forever and retain all the detail you need, so lean on payroll tools to handle the recordkeeping for you.

6. Ignoring Confidentiality

Not many people get to know their employees’ financial information. You, the IRS, your employees, a few banks, and third parties with claims for garnishment make up the bulk of the list. Leaving sensitive payroll information out in the open or divulging confidential information to an outside party can put your business — and your employees’ well-being — at risk. Protections don’t extend the other direction, though: Your employees may freely discuss their salaries with one another, and you can’t legally stop them from doing so.

7. Missing Deadlines

Run payroll at the same minute of the same day every time. Never rely on your ability to stick to your schedule to manage your payroll. Let the software handle it so your employees know exactly when they’ll receive their paychecks every week, two weeks, or month. You may not handle your finances down to the moment, but many people with debts and other obligations time their direct deposits and bill payments with little margin for error. Give plenty of notice ahead of payday changes if they’ll need to happen, but do your best to prevent them from happening in the first place. Again, payroll software should handle this for you.

As the business owner, your job should never involve manual labor to ensure your payroll processes on time. Your job is to make sure you have enough cash flow to cover payroll and keep your employees happy and productive. Avoid the big payroll mistakes that could cost your company dearly by putting in the legwork well before trouble rears its head.