Most Common Payroll Processing Mistakes Business Should Avoid

By Ashutosh Jha → Last Updated on Tuesday, March 31, 2020
Almost 30 percent of small business owners spend six or more hours per month on payroll. Many try to handle payroll in-house to keep the costs down.

Since payroll can be such a time-intensive task, though, it could actually be driving your costs up. Many small business owners spend thousands of dollars on payroll administration every year.

What’s more, common payroll processing mistakes can also drive up your costs. This is especially true for business owners who decide to handle payroll themselves. If you’re not familiar with the rules, you may get tripped up in some of the red tape.

That’s why we put together this guide. With it, you can recognize the most common mistakes business owners make. Then you can take steps to avoid them.

Worker Misclassification is Easier Than You Think

Payroll best practices often point to the need to make sure you’re classifying your workers. You might think that’s simple, but misclassification happens more often than you might think.

The problem is confusion over who qualifies as a contractor and who counts as “an employee.” An employer might think someone is a contractor, but the worker may have a different view.

Misclassification has become such a pressing issue that the IRS has set up a system to mediate cases. Some states have introduced stiff penalties to discourage employers from misclassifying people.

How can you avoid misclassifying workers? You can check in with the IRS and use their checklist to determine if your worker is a contractor or an employee. You may also want to consult with your state’s employment laws.

Changing Rules Make Calculating Overtime More Difficult

The Department of Labor recently made changes to the rules around overtime payment. These new changes make more workers eligible for overtime pay.

These changes come in response to a rise in the number of misclassification cases. Workers who were “exempt” from overtime rules have been awarded back-pay for overtime hours because they weren’t exempt.

Check the DOL’s updated rules carefully. If you’re not sure if a worker is exempt, it’s best to consult an employment law expert or a payroll professional.

Missed Deadlines Can be Costly

The most common mistake small business owners make when it comes to processing payroll is missing deadlines.

You may be able to pay your employees on time every pay period, so you might wonder how you’re missing a “deadline.” Most people end up missing a deadline related to their payroll deductions.

Each time you run payroll, you’ll make deductions for federal income tax and other payments. These include unemployment insurance programs and Social Security, among others.

Missing deadlines can run up your bill. A late payment is subject to interest. If you miss a payment, miscalculate, or pay late, you may also be assessed a penalty.

On average, business owners pay around $845 per year for missing a payroll deadline.

To avoid this issue, set up a payroll calendar and mark it with all the important dates. Be sure to check your remittance schedule for both federal and state deductions.

Keeping Good Payroll Processing Records is a Must

It’s easy to overlook the importance of good record-keeping in the payroll department. After all, payroll is time-intensive enough on its own. You’re more focused on making sure you get your people paid and make your payments to the IRS.

Good record-keeping is vital, though. Under the Fair Labor Standards Act, you must keep records of your payroll activities. This makes it easier for the IRS should they ever need to audit your business.

Good records also help your business stay organized. Preparing your employees’ W2s and your own business taxes is easier when you have good payroll records on file. It’s also easier to spot any mistakes you may have made.

You’ll also want to keep an eye on your data entry. Mismatched names and Social Security numbers are common. There’s a special number you can call to verify the information.

Other data entry mistakes, such as incorrect employee hours, can lead to mistakes. You may pay an employee incorrectly or calculate the wrong amount of tax. In turn, you may face penalties.

One easy way to make sure you have great records on hand is to use an online pay stub maker. These tools are easy to use and provide accurate calculations, based on your state. They’re also easy to send to your employees.

Incorrectly Calculating Paid Time and Deductions

There are plenty of other payroll missteps business owners sometimes make, and many of them relate to timekeeping.

Some timekeeping mistakes may be somewhat more visible than others. Paying employees for scheduled shifts can lead to errors. Employees may trade shifts or end up staying late.

Electronic timekeeping helps you keep track of all the changes. You’ll also want to consider it instead of automatically deducting meal periods, as employees may work through a meal. This can be difficult to disprove.

You may also want to keep an eye on other time information, such as travel time, time spent in meetings, and hours spent on training. Most meeting and training time should be paid, unless it meets four criteria:

  • Meeting or training session is voluntary
  • It’s outside the regular working house
  • It is not job-related
  • Employee doesn’t perform any productive work
If the session doesn’t meet these requirements, you’ll need to pay the employee for their time.

Stay on Top of the Rules

Payroll processing can be tricky, thanks to ever-changing rules and nuances. One of the best ways to stay on top of the rules and requirements to make sure you’re using the right software tools.

Want to learn more about how technology can help you manage your business? Take a look at our library of articles. We have everything, from comprehensive guides to the latest trends in tech to help you stay on top.

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Ashutosh Jha

Ashutosh Jha is a professional blogger, Blog and IT Consultant. He writes about Blogging, SEO, Making Money, Internet Marketing and Web Design.
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