Top 14 Payroll Mistakes and How to Avoid Them

Most small business owners can agree on one thing - good employees are some of the most critical assets of any company. Whether you have a staff of 2 or twenty, it's essential to have a small business payroll process that pays them (and yourself!) consistently and accurately. Payroll mistakes not only cause some unhappy employees, but they can also cause some big headaches around tax season.

Dive into our article as we reveal the top 7 most common payroll mistakes business owners make, along with strategies to prevent them. Don't miss out on these valuable insights!

Top 7 payroll errors you’ll want to avoid

Employee compensation can be challenging for any small business owner, and discovering a payroll discrepancy can be incredibly discouraging when you already have a long to-do list. Depending on the type and severity of your payroll mistakes, you might ask questions such as:

How can I resolve a payroll discrepancy?

How long does an employer have to fix a payroll error?

What are the consequences of payroll errors?

Here are some common payroll mistakes that anyone can make and some tips for avoiding them in your business.

1. Incorrect employee classification

When hiring someone for your business, it's essential to understand which classification to use - employee or independent contractor. One of the main differences between these classifications is the type of tax form they'll file for the wages you pay. An independent contractor should receive a 1099 tax form, while an employee will receive a W-2.

According to the IRS, an employer can be liable for taxes if an employee is misclassified as a contractor. If you need help classifying a worker, the IRS provides guidance through common law rules. These rules consider the behavior, finances, and type of relationship between the worker and employer. Being familiar with these rules is the first step in avoiding payroll errors.

2. Misunderstanding exempt and non-exempt

In addition to proper employee classification, you also need to confirm the status of exempt or non-exempt. This exemption status refers to the federal Fair Labor Standards Act (FLSA), which sets requirements about minimum wages and overtime. As a small business owner, this means that you’re required to pay overtime and a minimum wage to non-exempt employees. For more information on who should be exempt from the FLSA, check out the Department of Labor Fact Sheet. 

Violating the FLSA can lead to hefty fines, regulatory action, and even employee lawsuits, so it's essential to understand the difference between these two categories of employees.  

3. Disorganized records

Maintaining organized business records is essential to ensure you can easily find documents when needed. Saving your documents in different locations and using inconsistent file names will cause will only cause frustration and wasted time. This is especially true for payroll records such as paystubs and tax forms. 

If you fail to keep organized records, you'll face a lot more work and stress in the event of an audit or investigation by the Department of Labor. When regulators request specific documents, you want to avoid admitting to misplacing them. A simple way to avoid this mistake is to ensure an efficient organizational strategy. Keeping an organized database of employee documents can help prevent payroll issues and keep your business running smoothly. 

4. Forgetting about remote employees

Another common payroll mistake is forgetting that some employees may be in a different state. The number of remote employees has drastically increased over the past few years, which has caused a different set of challenges for remote payroll and taxes. For example, you must ensure that you incorporate your business in the state where your remote employee works.

If you make this type of payroll error, the consequences will likely depend on local laws and regulations. Always know where your remote employees work by requesting relevant tax forms with their addresses. If your remote employees are moving around and working in different states, this may require even more incorporations, so it's best to work with a professional who can advise on the next steps.

5. Mistake on paycheck

Some payroll mistakes might only sometimes be apparent right away, but an employee will likely point out an inaccurate paycheck. A paycheck contains many details, such as pay rate, number of hours worked, sick leave, etc., which can regularly change so that the total amount may differ every pay period. 

Making a mistake on a single paycheck might not lead to disaster, but it's still important to always strive for accuracy. There are several ways to make payroll more efficient to reduce the risk of errors, and one of the best strategies is outsourcing the task to a payroll professional.

6. Inconsistent pay periods

Pay periods will vary depending on the location of your business, but it's a good idea to designate a regular payday so your employees will know what to expect. Most business owners will choose weekly or bi-weekly pay periods, though the exact payday doesn't necessarily have to fall on the same date. For example, some paydays will inevitably occur on weekends or holidays, so you might need to adjust a day or two.

Processing payroll sporadically throughout the month will cause sloppy records and unhappy employees. You may also need to comply with specific regulations. Establishing a consistent pay schedule and informing your employees is good practice.

7. Not using direct deposit

For various reasons, some employees and small business owners may still prefer paper checks. While direct deposit is a more convenient and secure payroll method, the decision is ultimately up to the employee. Employers cannot mandate that paychecks be distributed through direct deposit, but this is still the preferred method when possible.

Not using direct deposit can lead to payroll discrepancies, especially if the check is handwritten. Human error is always a risk with any manual activity, so it’s advised to utilize automation to ensure consistency. 

FAQs about Common Payroll Mistakes

Now that we’ve identified some common mistakes, you might still have a few questions:

Can a dedicated payroll team make mistakes?

Of course, it's always possible that a payroll professional can make a mistake. However, the possibility for errors is generally greater if an inexperienced small business owner were to take on the burden of payroll processing. Plus, a payroll professional can resolve the mistake much more quickly. 

How do you overcome common payroll errors?

If you've discovered some errors in your payroll, don't panic. Partner with a professional who can advise you on what to do and help create a strategy to make your processes more efficient. 

How long does an employer have to fix a payroll error?

In general, it’s best to fix a payroll error immediately instead of waiting until the next pay period. The Department of Labor generally looks back two years into a company's records when the error involves an employee's back pay.

How to avoid payroll mistakes

Small business owners are responsible for a lot, so it's understandable to outsource specific tasks and lighten their load. Payroll is an area where mistakes can be costly, so consider the benefit of using innovative payroll software through 1-800Accountant. When you partner with our team, you'll gain the support and expertise you need to keep your employees paid on time.