7 Payroll Mistakes You Might Be Making

There's a learning curve when it comes to managing money, but don't let these payroll mistakes stop you!

Juggling payroll is going to be one of the more challenging responsibilities you face as a business owner. Make no mistake about it: There is a learning curve! But with the right technology and a trusted tax/bookkeeping professional, you can make payroll a breeze. Let’s talk about some of the more common payroll mistakes that businesses make and what you should be doing instead.

calculator, money

7 Common Payroll Mistakes Businesses Make

Are you committing any of these payroll mistakes?

1. Misclassifying Your Employees

You might have employees. You might also have freelancers or independent contractors. These are different roles, and they’re actually legal classifications. According to the Fair Labor Standards Act, most employees receive, under the law, certain benefits and protection — like minimum wage and pay for overtime. Independent contractors and freelancers do not. You must also consider exempt vs non-exempt employees.

If you misclassify your employees, you might be denying them money and benefits that they’re entitled to. It could also mix up the amount you’re responsible for paying in taxes. Compounded, these underpayments (or overpayments) can lead to a big financial headache.

Classifying your employees under the correct categorizations is important for keeping your business organized and in compliance with the law (and also for making sure everyone is treated fairly).

2. Forgetting to Send Out Tax Forms

While it’s true that ultimately, every individual is responsible for reporting their income to the IRS, businesses still have a duty to send out any and all relevant tax forms to their employees, on time. Employees should get their W-2s while independent contractors/freelancers who earned at least $600 that year need a 1099.

While the current due date for employers to file W2s is January 31, avoid waiting until the last minute! This way, if an employee notices any errors in their W2, you’ll have ample time to correct them.

3. Errors in the Amount Paid

It’s not just about the hours your team works and what they’re getting paid. You must also consider things like:

  • Overtime.
  • Commissions.
  • PTO.
  • Deductions.

Factors like overtime might vary depending on where your business is and where the employee is (more on this in a moment), so you should check with state laws to confirm you’re paying your team appropriately.

Should you pay a team member the incorrect amount, you’ll need to make a payroll correction to adjust it. This only costs you more time, and time is money (not to mention the additional money you’ll owe the employee, if you had previously underpaid them).

woman managing paperwork

4. Failing to Report All Forms of Compensation

When you think of your employees’ compensation, your mind likely goes to things like salary, commissions, and bonuses. However, there are other forms of compensation that the IRS considers taxable, such as:

  • Stock options.
  • Gift cards.
  • Travel rewards.

If you’re not sure if something is technically taxable compensation, you should check with a tax professional. Failing to report all taxable compensation can spell trouble for you and even your employees.

5. Not Keeping Your Records Organized

Sometimes, it’s easy to dismiss your tax responsibilities until you’re closer to tax season. But by then, it might be too late.

In reality, keeping neatly organized records is a habit you should practice year round. Not only is this going to make tax season a million times easier, but should you get audited, you could save yourself some money. The IRS can fine or penalize you if your payroll records are inaccurate or incomplete.

How long do you need to hang onto this paperwork, especially if an employee no longer works for you? According to the U.S. Equal Employment Opportunity Commission, who cites the Fair Labor Standards Act (FLSA), you should keep payroll records for at least three years. And yes, this applies even if an individual is no longer employed by you.

6. Processing Your Payroll in the Wrong States

Does your business have team members in other states (or countries)? Different states have different laws and regulations. As the business owner, you must follow the laws of the state where each employee works, not where you are or where the company is technically based.

If you don’t, the wages and withholdings could be inaccurate. This could lead to penalties, back pay, and trouble with the IRS.

exchanging money


7. Not Taking Responsibility for Your Payroll

As the owner of the business, everything starts and ends with you. Should something go wrong, you will not be able to place responsibility on your payroll software or even the accountant you worked with. If the IRS sees that, for instance, you’re misreporting what you spent on payroll, they’re going to come to you.

While you use software and hire professionals to take the burden off of you (as you should), you should still always have at least an idea of where you stand. This way, if something goes wrong (or an employee merely has a question), you’re not completely at a loss for words. 

Consider having quarterly — or even monthly — calls with your bookkeeper and/or tax professional to ensure that you’re on the same page and on schedule.

So, how can you avoid a major headache when it comes to these common payroll mistakes?

The first step is to find software you can trust. A point-of-sale system can make employee management a breeze, helping you stay organized when it comes to things like time sheets and reporting. Ready to learn more? Contract True POS today and get a free quote!

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