These Are the 3 Most Common Payroll Mistakes—Learn How to Avoid Them
When you’re a small business owner, it can seem like there are a million different things vying for your attention. And if you have employees, payroll is one of them. As a business owner, I know how difficult it can be to know all the payroll and employment laws. There are so many that it’s easy to forget some of them. That’s probably why small business owners make payroll mistakes.
Here are three of the most common payroll mistakes that small business owners make when running payroll.
The 3 Most Common Payroll Mistakes
1. Not Paying Overtime Wages
You must pay extra wages to nonexempt employees who work overtime. The federal Fair Labor Standards Act says nonexempt employees must receive one and a half times their regular rate of pay when they work more than 40 hours in a workweek.
Some states have stricter overtime laws. Depending on where you're based, you might have to give overtime pay after an employee works eight or 12 hours in a workday, or you might have to pay double their regular rate of pay.
There are some employers who try to get out of paying overtime wages. They will misclassify their workers as exempt from overtime pay. And then some will illegally use comp time by letting employees take time off to make up for any overtime worked; other employers will seek out loopholes.
Don’t avoid overtime pay. Unless your employees meet all of the requirements for exempt employees, you must compensate them for overtime work. If you don’t give overtime wages to your nonexempt employees, your workers can sue you, or the government might investigate your business. You also might owe back wages, back taxes, interest, and penalties. It’s better to pay overtime wages correctly now instead of paying even more later.
2. Not Withholding and Paying Taxes
I didn’t withhold payroll taxes for my first few employees. I didn’t have the knowledge to do it, nor did I have a system set up to do it for me. I would write checks, hand them out to my employees, and that was it. I was essentially paying my employees under the table.
That quickly changed when the father of one of my workers wanted to see his son’s pay stub. Well, there wasn’t a pay stub to show. I didn’t need to give employees a log of their pay and deductions because I wasn’t withholding payroll taxes.
When you pay employees, you must withhold, file, and remit taxes—it’s serious if you don’t. If you don’t pay payroll taxes, you may face IRS payroll tax penalties, criminal penalties, and imprisonment. The IRS can shut your business down.
Since my early days as an employer, I have learned a lot about running payroll. I fixed my early mistakes and found a way to run payroll legally. My early days even inspired me to found my company, which provides payroll software for small businesses.
Even though payroll taxes can be difficult to understand, entrepreneurs must find a way to handle them and avoid common payroll problems. The consequences are too great to ignore.
3. Not Running Payroll on Time
Your employees rely on the regular paychecks that you give them. They have bills and other expenses; some of them may even be on a tight budget.
There may be a time when you need to run payroll late because you don't have enough money to run payroll. Or maybe you just forgot to run it. Whatever you do, avoid running payroll late. Running a late payroll can make employees mistrust you. And a late paycheck could put some employees into financial trouble.
Not running payroll on time can have consequences for your business, too. Many states have pay frequency requirements that dictate how often you must pay your employees. Running payroll late might put your business in legal trouble.
How to Avoid Payroll Mistakes
Unless you are a trained payroll professional, I don’t recommend doing payroll by hand. Get help to avoid payroll mistakes. Use a professional or cloud payroll software. Find a system that will handle most things for you.
However, it certainly doesn’t hurt to brush up on payroll and employment law basics. Even if you let someone else handle the payroll calculations and taxes, it’s good to know the basics of how payroll works.
