How To Avoid Small Business Payroll Mistakes

Understanding business payroll is difficult, but rewarding. Deep knowledge of payroll administration is critical for the success and compliance of any small business. Unfortunately, even with the best intentions, mistakes can be made.

Due to differing laws from state to state, and even municipality to municipality, it is easy for small businesses to make costly payroll mistakes. Ignorance of the law is no excuse in the eyes of the government, so it is important for business owners to be well-informed.

Most small business owners will agree on one point: excellent staff are some of a company's most valuable assets. Whether you have two or twenty employees, a small business payroll procedure that pays them (and you!) consistently and properly is vital. Payroll errors not only result in disgruntled employees, but they may also cause major issues during tax season.

In this article, we’ll cover some of the most common small business payroll mistakes, and how to avoid them.

The Top 5 Common Payroll Mistakes

Here are a few of the most common small business payroll mistakes below:

1. Not Tracking Overtime

One of the most common small business payroll mistakes is not tracking overtime hours. This can lead to employees being underpaid, or even worse, being paid for hours that they didn’t actually work.

To avoid this, make sure you track overtime hours worked, and calculate the appropriate pay for each employee. You can use payroll software to help automate this process, like a 1099 generator.

The process of correcting errors takes time, and it may be quite stressful for the individuals involved, whether they were overpaid or underpaid and must repay money to the organization. Overtime compensation is more than just giving employees 1.5 times their regular pay rate for working more than 40 hours each week. Overtime payment mistakes can occur:
  • When workers work during their breaks
  • Also, when employees commute between job locations
  • When workers are obliged to engage in events that take place outside of usual business hours, such as training, teambuilding, or corporate parties

2. Not Calculating Holiday Pay

Another common mistake is not calculating holiday pay correctly. This can lead to employees being underpaid or even overpaid. To avoid this, make sure you know how to calculate holiday pay, and factor it into your payroll calculations. There are plenty of online calculators available to help calculate holiday pay — it’s almost always well worth your while to invest in one!

An inaccurate paycheck may be aggravating for any employee, especially if it results in missing wages. Miscalculations also cost time since you'll have to devote hours or even days outside of the typical payroll cycle to investigate and remedy problems. According to a study by the American Productivity & Quality Center (APQC), businesses need two to ten days to fix a payroll problem. During the time it takes to fix such issues, employees could become irate or struggle to pay their obligations.Pay mistakes can happen to both salaried and hourly workers. The following are a few instances of typical calculation errors:
  • Employee overpayment or underpayment
  • Making incorrect retroactive payments
  • New hires missing their first payday
  • Deducting benefits or other payroll deductions incorrectly
  • Paying employees who are on disability or other absences incorrectly

3. Not Factoring in Taxes and Other Deductions

Another mistake small business owners often make is not factoring in taxes and other deductions when calculating payroll. This can lead to employees being underpaid, potentially resulting in financial difficulties. Alternatively, if too little is withheld from their paychecks, employees may face a significant tax bill.

To avoid this, make sure you know how to calculate payroll taxes and other deductions.

4. Paying Taxes on Overseas Employees

If you have employees who are working remotely, from another country, you may be tempted to pay their taxes in their home country. However, this can be a mistake, as you may be subject to double taxation.

Instead, you should pay your employees’ taxes in the United States, where they reside. This will help avoid any penalties or fines from the IRS.

5. Not Keeping Up with Changes in Tax Laws

Tax laws are constantly changing, and it’s important to stay up-to-date on the latest changes that could affect your small business payroll. Failing to do so can lead to costly mistakes and penalties from the IRS.

To stay informed, subscribe to a tax newsletter or consult with an accountant who can help you stay up-to-date on the latest changes.

Is it possible for a specialized payroll staff to make mistakes?

Of course, an error by a payroll specialist is always feasible. However, if an inexperienced small business owner takes on the burden of payroll processing, the likelihood of errors increases. Furthermore, a payroll professional can correct the error much more quickly. 

How can you avoid frequent payroll mistakes?

Don't be alarmed if you notice some inaccuracies in your payroll. Collaborate with a specialist who can advise you on what to do and assist you in developing a strategy to improve the efficiency of your processes.

How much time does an employer have to correct a payroll error?

In general, it's better to repair a payroll problem right away rather than waiting until the following pay month. When an employee's back pay is involved, the Department of Labor normally goes back two years into a company's records.

How to Avoid Payroll Errors

Small company owners have a lot on their plates, so it's reasonable for them to outsource particular activities to lessen their burden. Payroll errors may be costly, so consider the advantages of adopting modern payroll software from 1-800Accountant. When you work with our team, you'll get the assistance and knowledge you need to keep your employees paid on time.

Avoiding Small Business Payroll Mistakes

Prevention is always better than the cure. In this case, it’s especially true. Avoiding small business payroll mistakes is key to ensuring your employees are paid accurately and on time.

There are several ways to avoid payroll mistakes, but easily the most effective is to outsource your payroll to a reputable provider. When you outsource your payroll, you’re entrusting a company with years of experience in the field to handle all of the details for you. From calculating wages and deductions to issuing paychecks and filing taxes, a professional provider will take care of everything for you so that you can focus on your business.

Developing deep relationships with accountants and virtual bookkeepers can also help you avoid payroll mistakes. By having a team of professionals who understand your business and your books, you’ll be able to rely on their expertise to help you stay on top of your payroll — and your finances as a whole.

Finally, it’s important to keep up to date with the latest payroll laws and regulations. This can be time consuming, but it’s well worth the effort to make sure you’re in compliance with all relevant rules and regulations. Failing to do so can lead to hefty fines and other penalties, not to mention a lot of wasted time and energy trying to fix the mistakes you made.

Making small business payroll mistakes can be costly, time consuming, and stressful. By following the tips above, you can avoid these mistakes and keep your business running smoothly.

Conclusion

In summary, business payroll is subject to a variety of technically challenging rules and regulations. Even small businesses can make costly mistakes if they are not diligent in their compliance efforts. By taking the time to understand the basics of payroll and by implementing the aforementioned best practices, business owners can help ensure that their payroll functions smoothly and that their employees are paid accurately and on time.