How to Avoid These 10 Common Payroll Errors in Your Start-Up

How to Avoid Payroll Mistakes in Your Small Business

Payroll is an essential function in any business.

When done well, payroll helps your organization avoid legal consequences and keeps employees content. However, mistakes in payroll can be costly to fix, both in time and money.

Fortunately, most common payroll mistakes are easy to navigate, fixable, or avoidable with proper planning. To avoid these 10 common payroll errors, such as misclassifying employees and miscalculating pay, let’s examine why correcting these mistakes is important.

Why you should correct payroll mistakes

All businesses must do payroll, but it can mean something different for each company. For example, payroll can refer to:

  • The employees you pay, including employee information.
  • The amount paid to employees each pay period.
  • The process of calculating and distributing taxes and wages.

In a payroll program, an employer must follow the payroll laws of the state they inhabit. For example, under California law, the minimum wage must be $14.00 per hour for businesses with more than 26 employees and $13.00 per hour for companies with 25 or fewer.

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Employee satisfaction

An employer who pays an employee incorrectly or deducts taxes incorrectly will frustrate and worry the employee. Unsatisfied employees won’t work hard, leave your start-up, and write bad reviews for your company.

During tax time, an employee will have to pay out of pocket for miscalculated taxes, and the employer must do the same with added penalties.

Penalties and jail time

If an employer paid a worker the wrong wage, they could face fines or even jail time. Employees would have a right to sue the employer, which could cost them their livelihood, reputation, and personal finances.

Willful violators of wage theft could receive fines up to $10,000 and imprisonment. It’s common for a judge to rule wage theft as “willful” because ignorance of the law is rarely usable as a reason to violate the law.

For these reasons, it’s necessary for all small businesses to adhere to Federal payroll laws as well as State-Specific Tax Laws.

How to avoid 10 common payroll errors

With a process as complicated as payroll, there are numerous places an organization can make fatal errors. Let’s look at the 10 payroll mistakes your company should tackle immediately.

1. Misclassifying workers as independent contractors

Misclassifying workers as independent contractors reduces labor costs but is unfair to both employees and other companies and can lead to a fine.

2. Incorrectly identifying workers as exempt or non-exempt

Exempt employees are not entitled to overtime. If a non-exempt employee is treated as an exempt employee, they miss out on overtime.

3. Not paying the correct amount of overtime

Non-exempt workers should be paid time and a half for any hours worked above 40 per week.

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4. Choosing the wrong payroll service provider

Choose a payroll service provider that suits your company’s needs.

5. Not keeping payroll records for long enough

Keep payroll records for at least three years. It’s preferred to keep records longer to show proof of accuracy.

6. Having multiple people trained on the payroll software

Have a backup person who can run payroll if needed.

7. Not maintaining confidentiality

Ensure payroll information remains confidential and secure.

8. Overpaying or underpaying employees

Double and triple-check your work to avoid overpaying or underpaying employees.

9. Missing a tax deadline

Be aware of tax deadlines and initiate payments well ahead of time.

10. Paying your employees late

Paying your employees late can lead to potential lawsuits and financial hardship.

Keep your employees happy and stay compliant

Staying on top of payroll is crucial to avoid serious consequences. Avoid these common payroll mistakes to successfully scale your business.

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