Six Mistakes Small Businesses Make When It Comes to Payroll

Every small business needs to learn how to run payroll properly – even the smallest mistakes could cause fines or employee dissatisfaction. But, businesses can make errors and they could cost them a lot. To avoid them, every company – no matter the size – should be very careful and insist on accuracy.

Here are some of the most common mistakes and techniques to avoid them.

1. Classifying employees improperly   

Any company can have employees and independent contractors on its payroll. One of the biggest mistakes you can make is mixing these two.

For one, you don't have to pay minimum wages or overtime wages to independent contractors. You also don't withhold taxes from their wages. If you classify an employee as an independent contractor, that worker will lose his or her wages and the government will lose its taxes. In this case, you'll have to pay employee and employer taxes with penalties and interest and may owe some wages to your employee. 

'To avoid this, classify all of your employees correctly. If you are not sure if a worker is an employee or a contractor, you can test this with six-part economic realities test or you could file Form SS-8 so that the IRS can determine their status', said Charles Sprague, a communication manager at Academized.

2. Classifying exempt employees poorly  

Just like there are two classifications of workers, there are also two classifications of employees. There are exempt and nonexempt employees.

The difference is you don't pay overtime wages to exempt employees, but you do pay them for nonexempt employees. If you make a mistake of classifying a nonexempt employee as exempt, he or she will miss out on wages and you'll owe them money.

An exempt employee must meet Fair Labor Standards Act (FLSA) exemption standards such as:

- You pay them salary

- Their salary is a minimum of $23,660 a year

- Their job duties are of great responsibility and they affect the company's operations

3. Paying late 

Once you decide on a payment schedule, you must be consistent with it. Your employees depend on you giving them wages and a missed paycheck could seriously damage the trust that they have in you. Not running payroll on time can also make you non-compliant with state pay frequency requirements;

You need to always run your payroll on time – if you need to, set a reminder. Always run your payroll in advance so there is enough time for payment processing and your employees don't have to wait.

4. Miscalculating overtime wages 

Overtime wages are different than regular wages and it's imperative you calculate them correctly. If you don't pay correct overtime wages, you risk owing wages and paying penalty and interest. The FLSA says that you must pay 1.5 times the regular wage for overtime work – beyond 40 hours a week. 

Irene Johnson, an operation manager at Revieweal writer said, 'Some states and cities have different overtime wages and it would be best if you checked with your own state how much you need to pay to avoid paying penalties and interest'.

5. Paying the wrong tax rates 

Because tax rates change so often, this may cause you some payroll issues. The rates you started off with may not be correct anymore and you'll owe taxes with penalties and interest. To avoid this, check your tax rates regularly. Here are the taxes you need to check:

• Federal income tax
• Social Security tax
• Medicare tax
• Federal unemployment tax
• State income tax
• State unemployment insurance tax
• Local income tax, like JEDD taxes in Ohio

Depending on where you are, you might need to check for more taxes. For example, Pennsylvania and Ohio both have extremely complex tax systems.

6. Payment schedule 

Your payment schedule has an impact on your cash flow and operations, but it also impacts your employees. The most common frequencies are weekly, bi-weekly, semi-monthly, and monthly. Laws usually require a minimum pay period where you can always pay your employees more frequently but not less frequently. Each one of these payment schedules has its advantages and disadvantages. Here is a quick look at each method.

• Weekly: paid every week, costs and implications are medium, hourly employees prefer it.
• Bi-weekly: paid every two weeks, usually on Friday, costs and implications are medium-low, hourly employees like it but prefer weekly payment, salaried employees prefer it;
• Semi-monthly: paid two times per month, processing costs and implications are low, hourly employees have a low preference for this schedule, but salaried employees prefer it.
• Monthly: paid one time per month, processing costs and implications are the lowest, both salaried and hourly workers have a low preference for this payment schedule. 

Mistakes are easy to make and they can cost you a lot. Follow these tips to avoid them.

Looking to learn more on a specific topic mentioned above? Head over to PayrollTalk. 

Freddie Tubbs is a communication manager and a business writer at Bigassignments. He is running an Australian help blog and is a regular contributor to the Vault and Ukservicesreviews.