7 Payroll Mistakes That Can Cost Small Businesses More Than You Think
For small businesses, payroll errors can affect more than the numbers on a paycheck. Here are 7 common payroll mistakes worth watching for and what businesses can do to avoid them.
Payroll mistakes rarely announce themselves with flashing warning signs. Sometimes, it’s one incorrectly entered hour, a missed tax deadline, or an employee who was classified the wrong way months ago.
The problem often doesn’t become obvious until an employee questions a paycheck, a tax notice arrives, or the business discovers it has been repeating the same error across multiple payroll cycles.
For small businesses, payroll errors can affect more than the numbers on a paycheck. Here are 7 common payroll mistakes worth watching for and what businesses can do to avoid them.
1. Misclassifying Employees as Independent Contractors
Hiring a contractor and hiring an employee aren't interchangeable from a payroll perspective.
The IRS considers the actual working relationship when determining worker classification. Employees generally require employers to withhold income, Social Security, and Medicare taxes and pay applicable employer payroll taxes. Independent contractors are generally treated differently.
Misclassification can therefore leave a business responsible for employment taxes it should have been withholding or paying all along.
This becomes especially important as small companies grow and begin using a mixture of full-time employees, part-time workers, freelancers, and contractors.
Quick takeaway: Don't choose a worker's classification simply because one option makes payroll easier. Make sure the classification reflects the actual working relationship.
2. Getting Employee Hours or Overtime Wrong
Five minutes here and an hour there may not look significant until those discrepancies are multiplied across employees and pay periods.
For covered, nonexempt employees, employers are required to maintain accurate records of hours worked and wages earned. Those records include daily and weekly hours as well as overtime earnings.
Manual timecards, forgotten clock-outs, scheduling changes, and last-minute overtime can make accurate payroll considerably harder.
An integrated time and attendance system can help close that gap. Universal Select offers SwipeClock solutions that connect time tracking with payroll and include features such as digital time clocks, overtime tracking, mobile clock-in/out, scheduling, and labor reporting.
3. Missing Payroll Tax Deadlines
Paying employees is only one part of running payroll. Businesses also have to manage the taxes associated with those wages.
Employers generally must deposit withheld federal income taxes along with applicable Social Security and Medicare taxes. Depending on the business, federal employment tax deposits may follow a monthly or semiweekly schedule.
Missing those deadlines can get expensive. The IRS notes that late employment tax deposits can result in penalties and interest, with Failure to Deposit penalties potentially reaching 15% depending on how late the deposit is.
The mistake isn't always a lack of funds. Sometimes it's simply a missed deadline or misunderstanding of which deposit schedule applies.
4. Making Incorrect Payroll Deductions
A paycheck can contain far more than wages and taxes.
Depending on the employee and company, payroll may also need to account for health benefits, retirement contributions, garnishments, PTO, and other deductions. One incorrect setup can continue affecting paycheck after paycheck until someone notices.
This is where payroll accuracy becomes particularly important. Employees expect their paychecks to be right, and repeated discrepancies can quickly undermine confidence.
Universal Select's payroll services can incorporate items such as 401(k) deductions, company-sponsored health plan deductions, garnishments, and vacation, PTO, and sick-day tracking into payroll processing.
5. Forgetting About Multi-State Payroll Requirements
Remote work has made this one much easier to stumble into.
Imagine a Jacksonville company hires an employee who works remotely from another state. The company may still feel like a Florida business, but payroll just became a multi-state issue.
Where an employee works can affect payroll tax and reporting obligations, which means adding employees in new states shouldn't be treated like simply adding another name to the payroll system.
Businesses expanding beyond their home state should determine what payroll requirements apply before the employee's first paycheck rather than trying to correct everything afterward.
Universal Select is headquartered in Jacksonville and provides payroll services for businesses operating in multiple states.
6. Keeping Poor Payroll Records
When everything is running smoothly, documentation can feel like background work. Then someone disputes their hours… or you need to verify an old deduction…or a payroll question comes up months later.
Suddenly, those records matter quite a bit!
The Fair Labor Standards Act requires covered employers to maintain specific information for nonexempt employees, including hours worked, pay rates, overtime earnings, additions and deductions, total wages, and pay periods.
Good recordkeeping also makes everyday payroll management easier. Instead of reconstructing what happened months later, businesses have an organized history to reference.
7. Trying to Handle Everything Yourself as the Business Grows
DIY payroll may work perfectly well when a business has two employees. It can become a very different job at 20.
More employees can mean more timecards, deductions, new hires, tax filings, PTO requests, benefits, reporting, and opportunities for something to slip through the cracks.
The mistake isn't necessarily handling payroll internally. It's failing to recognize when payroll has outgrown the system you originally built for it.
The IRS itself notes that third-party payroll providers can streamline business operations and assist with employment tax filing and deposit requirements. Employers should remember, however, that outsourcing payroll doesn't eliminate their ultimate responsibility for federal tax liabilities.
How Can Small Businesses Reduce Payroll Mistakes?
The goal isn't to create more checks, spreadsheets, and administrative work in an attempt to catch every possible error. It's to build a payroll process that makes errors less likely in the first place.
Universal Select provides payroll services for small and mid-sized businesses in Jacksonville, throughout Florida, and beyond. The goal is to make payroll easier to manage without leaving business owners on their own when questions come up.
And when you need help, you can talk to a real person who knows your business, rather than starting over with a different call center representative every time.
Ready to simplify payroll and spend less time worrying about what might have slipped through the cracks?
Learn more about Universal Select's payroll services
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