Common payroll mistakes to avoid
Making mistakes in your business’ payroll process can cause unwanted problems. From increasing your workload, to costing your business additional money, and even upsetting your employees, mistakes can be crippling for a business. There are a handful of everyday errors that your business can easily avoid with a little extra knowledge and attention. Let’s take a look at the common payroll mistakes to avoid.
Common payroll mistakes to avoid
While payroll is a vast topic and many mistakes can occur at any stage of the process, there are some common mistakes can that easily be avoided. Avoiding these mistakes will reduce your administrative burden, improve your business’ financial health and help increase your employee engagement and retention. Common mistakes to avoid include:
- Misclassifying employees
- Processing payroll late
- Miscalculating overtime
- Misreporting taxable income
- Overlooking banking holidays
- Incomplete payroll records
- Forgetting to file taxes timely
Navigating these issues is easy with the right knowledge and a little extra care. Let’s discuss each mistake in further detail.
Misclassifying employees
Classifying employees correctly is key to maintaining compliance. There are a few different categories to consider when hiring employees. Making mistakes when classifying employees can cause an administrative headache come year end and result in fines levied by the IRS for your business.
First, are your employees going to be W-2 employees or 1099 employees? The typical employee that a business employs is known as a W-2 employee. This employee works for the business and performs specific tasks based on the role within the company. 1099 employees are independent business owners and are not employed by the company. They are hired for a period of time and agreed upon fee set by a contract. Therefore, you are not required to withhold and remit payroll taxes on their behalf.
Secondly, businesses must classify their employees as exempt or non-exempt correctly. The main difference between the two comes down to how you pay them. Following guidelines set by the Fair Labor Standard Act, exempt employees are paid a salary of at least a certain amount that is set by state and federal governments and are not eligible for overtime pay. On the other hand, non-exempt employees are paid an hourly or salary rate that at least meets the minimum wage. These employees must be paid overtime for any hours worked over 40 hours in any 7 day period.
Processing payroll late
Paying your employees on time is one of the easiest ways to keep them happy. If using a payroll vendor to manage your process, know their requirements on when to submit your payroll for timely processing. Waiting until the last minute can cause unnecessary stress and pressure, opening the door for mistakes. Furthermore, should errors occur in the data entry, there would be ample time to make corrections if your payroll has been submitted prior to the deadline. Other factors such as banking holidays, low account funds, internet issues and more can delay your process. Being timely allows you to remedy all of these issues without your employees seeing a disruption in pay.
Miscalculating overtime
The FLSA requires employers to pay non-exempt employees 1.5 times their wage for any hours worked over 40 hours in any 7 day period. Further, should an employee work different positions with different rates of pay, employers should use the blended overtime rate to pay these employees correctly. Businesses could be responsible for paying back wages at year end should they miscalculate overtime pay throughout the year. Make sure to know and follow overtime rules correctly. There are certain strategies that you can follow to reduce your overtime costs. Simply categorizing your employees as exempt may not be the best course of action in all instances.
Misreporting taxable income
Many businesses reimburse their employees for certain expenses. Employers must know which of those reimbursements is considered taxable versus nontaxable income for the employee. Generally, reimbursements for “business necessities” are considered nontaxable income for the employees. Items that are “non-business” related are typically considered taxable income and must be added to an employee’s wages and Form W-2.
Overlooking banking holidays
Similarly to processing payroll late, overlooking the days in which Federal banks, and your payroll vendor, are closed results in delayed paychecks for your employees. Delayed pay means unhappy employees. Year end is a time in which banks are closed often and your employees rely on receiving their paychecks for holiday shopping. It is important to know when to submit payroll for timely processing around bank holidays.
Incomplete payroll records
An unorganized payroll process is recipe for an inefficiently run business. Relying on paper processes and manual data entry leads to errors that can take months to uncover and fix. Additionally, disorganized records will result in missed payments or revisiting items needing urgent attention.
Paperless payroll fixes all of these mistakes. With paperless payroll, your company’s historical payroll is kept in one place that is easy to access. Come year end or audit time, documents and reports can easily be retrieved for review. Any errors can easily be tracked down and corrected when your payroll records are complete. Furthermore, some State and federal laws call for businesses to maintain specific employee records, so it is imperative that your business follows such requirements.
Forgetting to file taxes timely
Finally, forgetting to file your payroll taxes by the appropriate deadlines will result in additional fines for your business. Most businesses must file their taxes on a quarterly basis. Using a payroll software, or third party payroll vendor, helps in making sure your taxes are filed on time. Deadlines for taxes payments are as follows:
| Quarter | Start | End | Due Date |
| First | January 1st | March 31st | April 30th |
| Second | April 1st | June 30th | July 31st |
| Third | July 1st | September 30th | October 31st |
| Fourth | October 1st | December 31st | January 31st |