Small businesses can’t neglect the importance of their payroll responsibilities. And, unfortunately, making a small error can lead to financial headaches and dissatisfied employees. 

While recordkeeping missteps or paystub compliance problems can be commonplace, it’s possible to avoid these issues with some extra diligence. 

If you stay aware of the common payroll mistakes, you will be able to manage the company better and protect it from paying a hefty paycheck.

Common Payroll Mistakes To Stay Clear Of

Read on to learn about ten common payroll mistakes that can hurt your business, and how to avoid them. 

1. Miscategorizing Workers as Independent Contractors

The last thing you want to do is misclassify your workers as independent contractors. When workers are categorized as such, they’ll need to do their own taxes, and they won’t receive benefits. 

Make sure to classify workers as employees when you should. Otherwise, you could be faced with stiff penalties from the IRS, including back taxes and unpaid wages, such as overtime. 

It’s wise to work with an HR expert to confirm that you’re properly identifying your workers for tax purposes. 

2. Mistakes with Overtime Rules

When an employee surpasses a standard 40-hour work week, they’ll be entitled to overtime pay. While overtime doesn’t apply to exempt employees, it does apply to everyone else. 

You may be liable for paying time and a half, for instance, for any additional time beyond the standard work week. 

You can’t afford to overlook overtime or make miscalculations. You may be held accountable for back pay or face fines. And, of course, you’ll disappoint your employees, which could tarnish your reputation and hurt company loyalty. 

3. Pay Stubs without Adequate Details

Did you know that pay stubs need to meet state law requirements? It should list an employee’s pay, plus necessary tax withholdings. The pay stub should also indicate both gross and net pay. Without the essential details, you may be stuck paying fines. 

Fortunately, inadequate pay stubs are an easy problem to fix. With a FormPros quick pay stub generator, you won’t have to deal with calculations, and you can tailor the pay stub to include the information that is required. 

Employees will appreciate the detailed breakdown that shows them all deductions that result in their net pay.  

4. Fake Pay Stubs

When a job applicant submits a pay stub for a loan or even as proof of previous income, employers tend to assume the pay stub is real. Unfortunately, that’s not always the case. Some small businesses may unknowingly accept fraudulent pay stubs.

Small businesses must be savvy with identifying inconsistencies, like scant employer details, uneven fonts, or even misspellings. Sometimes, pay stub scanning tools can help catch these problems before an employer moves forward with an application. 

5. Unlawful Employee Pay Schedules 

While you might prefer to pay your employees on a monthly schedule, you might not be allowed to do that in your state. It’s important to check the requirements for pay schedules. 

Don’t make assumptions, either, since requirements are not likely to be consistent from one state to the next. You may need to make bi-weekly or semi-monthly payments, for instance, depending on where you live. 

Without following your state’s requirements, you could get in legal trouble. And you’ll frustrate your employees, too. They will be depending on a regular pay schedule to help manage their personal budgets. 

6. Missing Payroll Tax Deposits

The IRS won’t look favorably upon missed payroll tax deposits. When you’re late with deposits or miss them entirely, you’ll face fines. You can create reminders in your payroll system to help make sure that doesn’t happen. Even better, automate your deposits so you’re always on time. 

7. Failure to Report New Hires

When you hire or rehire an employee, the state needs to know about it. And, frequently, they need to know within roughly 20 days to help avoid problems related to child support or fraudulent unemployment claims. 

Make sure your onboarding process for new hires includes reporting to the state, so you don’t forget to check this requirement off your to-do list. 

8. Insufficient Payroll Records

To meet federal law requirements, plan on hanging onto your payroll documentation for a minimum of three years. 

Check state requirements, too, to see if there are additional records or details you’ll need to report. If you’re ever audited or an employee questions their pay, you’ll need these records. 

Yes, staying on top of payroll recordkeeping helps you stay compliant with federal laws. But by maintaining an organized file with pay stubs, taxes, and benefits details, you’ll help protect your brand if there is ever a dispute. 

9. Tip Credit Mistakes

For restaurants, managing payroll can be a little more challenging. Tipped employees start with a lower minimum wage. However, that only holds if the tip totals elevate their pay rate to at least the normal minimum wage. 

Make sure to track tips and, if needed, make up the difference so your employees are always hitting minimum wage. Otherwise, you could deal with angry employees and legal repercussions. 

10. Inaccurate Payroll Deductions for Benefits

Generally, employee paychecks will see deductions for health insurance coverage and retirement contributions. But if the math is faulty, you may hit problems with your employee benefits. 

Track all changes to deductions and check your math. Square your deductions with provider invoices, too, and use payroll software to tackle calculations for more accurate results.

11. W-2 and 1099 Problems

When the year wraps up, you’ll need to send out W-2s to your employees, plus 1099s to any contractors you’ve used. 

Be sure to map these mailings into your calendar so you’re not waiting too long to send them. It’s too easy to send them late or make other errors, like overlooking taxable benefits. 

Inaccurate W-2s could result in IRS penalties and unhappy employees. Check your payroll records as the year closes out to ensure that you’re sending accurate W-2s.

Read Also: How Line Of Credit Business Loans Help Manage Cash Flow?

Avoiding Payroll Missteps

Payroll mistakes only add more headaches to your to-do list. As a business owner, you don’t want your attention diverted to costly errors that could have been avoided in the first place. 

Further, when your employees are unhappy because the common payroll mistakes are affecting their paychecks, you could lose some of your best workers to other jobs. 

With some diligence and strong recordkeeping, however, you can avoid these mistakes. Keep all payroll documentation, abide by federal laws, and use software to generate complete and accurate pay stubs. 

When you’re dutiful as a business owner, you’ll see the results in the form of a more efficient business with happier employees. And, in the long run, you’ll save money and earn a positive reputation.