A good payroll system is critical for every business. Payroll mistakes can damage your relationship with employees while also causing inconveniences and even potential penalties for your business. Here are six payroll mistakes to avoid at all costs.
1. Not Tracking Overtime
If employees are working more than 40 hours in a week, you need to make sure you're tracking this, unless they are exempt from federal overtime requirements. In general, those exempt from overtime pay, according to the U.S. Department of Labor, are "employed as bona fide executive, administrative, professional, and outside sales employees," as well as 'certain computer employees.’"* If you’re not sure about the status of an employee, it would be worth your while to get advice from your local Department of Labor office.
The Department of Labor says, "The federal overtime provisions are contained in the Fair Labor Standards Act (FLSA). Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.” **
2. Not Paying Workers on Time
Unforeseen issues can arise on occasion that prevent businesses from being able to pay workers on time, but these need to be avoided as much as possible. Have a set time of week to pay employees and stick to it. If a holiday or some other circumstance interferes with your ability to pay at the regular time, be sure paychecks are distributed beforehand, not afterwards.
3. Not Classifying Workers Properly
Be sure you are classifying workers properly. Know the difference between an employee and a contractor, even if the latter puts in as much time for you as an employee would. An employee works directly for you. They are subject to federal requirements, such as overtime and minimum wage. Taxes are withheld from their paycheck, and they receive a W-2. A contractor, on the other hand, is someone who works for themselves, and you are simply paying them for their services. They work based on agreed-upon payment, but you are not responsible for minimum wage, overtime, etc. Taxes are not withheld from their payment, and they would receive a 1099 rather than a W-2.*** Again, get an official ruling if you’re unsure.
4. Not Getting Tax Rates Right
As Forbes points out, tax rates may change from year to year, and missing this can cause payroll headaches.****
"When you calculate and pay the wrong tax rate, you must make up the difference," explains Forbes contributor Mike Kappel. "And, (you probably guessed it!) you might also have to pay late fees, penalties, or interest on said taxes. To avoid making this big blunder and shelling out extra cash, be aware of which taxes you may need to update rates for."
5. Forgetting to Send Tax Forms
Another potential tax-related mistake is forgetting to send tax forms on time. This can create problems for you and your employees. W-2s and 1099s must be sent out no later than January 31st each year.
6. Not Keeping Organized Records
It's a good idea to use payroll software so you can keep detailed, accurate records in an organized fashion. This helps identify and fix errors and provide reference when you need it, not to mention helping you avoid most of the mistakes above. It can also help if the person who is in charge of payroll is unable to perform their duties at any point in time.
A great way to ensure you avoid these mistakes is to get a payroll service. Get access to a program to help you post your own payroll accurately, or get a third-party provider to process your company’s payroll. Nevada State Bank offers options to simplify payroll processing for any size business.
* https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/fs17a_overview.pdf
** https://www.dol.gov/agencies/whd/overtime
**** https://www.forbes.com/sites/mikekappel/2022/04/27/8-payroll-mistakes-to-avoid-at-all-costs/
