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Managing payroll is one of the most crucial functions of any small business. When done correctly, it can help keep your employees satisfied and the company free from legal conflicts. However, handling business payroll can be complicated for untrained staff. Payroll mistakes can have costly consequences. 

Here are 8 of the most common small business payroll errors:

1. Misclassifying workers as independent contractors

One factor considered in payroll management is the relationship between the employer and the individuals rendering services to the company. It is critical for small business owners to correctly classify the workers, as this affects their tax obligations. Companies are generally required to withhold and pay income taxes, social security taxes, Medicare taxes, and unemployment taxes on wages paid to employees. On the other hand, companies are not commonly required to withhold or pay any taxes on their payments to independent contractors. Business owners must correctly determine whether the people providing services are considered employees or independent contractors.

When employees are misclassified as independent contractors, the employer’s share of taxes is not paid, and their share is not withheld. The misclassification causes affected employees to lose important wages and benefits while the government consequently loses significant tax revenue. Thus, businesses that misclassify workers as independent contractors without a reasonable basis shall be liable for these employees’ employment taxes. 

Entrepreneurs may use the Department of Labor’s Six-Step Guide or the Internal Revenue Service’s 3 Common Law Rules as guides to help them classify their workers correctly. If they are still confused, they may file a Form SS-8 with the IRS, and the IRS will determine the employee classification for them.

2. Incorrectly identifying workers as exempt or nonexempt

Another common payroll error for small businesses is the incorrect identification of employees as exempt or nonexempt. The exempt and nonexempt categorization of employees is regulated by the Fair Labor Standards Act (FLSA). What does it mean to be an exempt employee and a nonexempt employee?

Exempt employees are exempt from minimum wage and overtime pay requirements. These employees are usually paid a salary rather than an hourly wage. Executive, administrative, professional, computer, and outside sales employees generally fall under this category. These employees are paid their full salary no matter how many or how few hours they work in a pay period.  They are not entitled to overtime even if they exceed federal or state limits.

Nonexempt Employees are entitled to at least the federal minimum wage and overtime pay. Overtime pay is calculated as one and a half times their hourly rate for each hour worked more than the standard 40-hour workweek (may vary by state). Nonexempt employees usually are in positions that carry out orders and do not make management decisions. Examples of nonexempt employees are people who do physical labor in the construction and manufacturing industries.

Incorrect identification of an employee as exempt or nonexempt can result in costly penalties for the small business. Thus, reading and following FLSA Coverage in classifying your employees is essential.

3. Not paying the correct amount of overtime

To prevent errors in overtime payroll computation, business owners must comply with the Fair Labor Standards Act (FLSA) and their state’s rules on overtime and maintain accurate employee time management. Failure to pay the correct amount of overtime may result in employee complaints and a decrease in the employees’ trust in the company’s payroll system, especially if errors happen repeatedly.

Aside from using an overtime rate less than the FLSA/state requirement, incorrect overtime computation may also result from an inaccurate recording of employee work hours. Employers must thus ensure that they’re using a reliable time-keeping system.

4. Not keeping payroll records for long enough

Improper filing and disposal of payroll documents is another common payroll mistake. According to the IRS, payroll and employment tax records must be kept by employers for a minimum of four years. Employers must be able to present these records for IRS or FLSA review. These documents may also be used as proof in settling disputes, so it would be wise for employers to keep them as long as possible, even for employees who have left the company.

5. Not having a backup plan for handling payroll

It is always wise to have a plan if your normal method of handling payroll is suddenly not available. If, for whatever reason, the designated staff cannot prepare the payroll and handle tax filing and payments, the backup personnel can perform the task without causing a delay in your everyday business process. A delay in salary distribution may result in employee discontent while missing tax deadlines could result in significant fines.

6. Missing a tax deadline

Failure to meet deadlines for payment of payroll taxes is also a common error that causes large penalties and surcharges to be applied until the penalty is paid. Avoid unnecessary fines by filing and paying your tax obligations before the due date. The company’s payroll staff should be updated with federal and state laws to ensure payroll taxes are filed accurately and on time.  Tax depositing and tax filing deadlines never end, and there’s no flexibility in deadlines.

7. Neglecting To Plan For Bank Holidays

Small businesses may neglect to plan for bank holidays. Failure to prepare for such holidays may delay employee salary payout, resulting in employee dissatisfaction. Ensure employees are always paid on time by having an updated holiday schedule; if they receive their salary through direct deposit, the standard practice for many businesses is to pay the employee before the scheduled holiday. No federal or state laws specifically address this; however, it’s important to be consistent with payroll payments. Also, ensure that changes in payout dates are always announced or consistently referred to in the employee handbook.

8. Paying Late…Or Not At All

Paying employees late or not at all is a significant payroll error that could result in a lawsuit. Late payouts cause a financial burden on the employees and imply that the business is either disorganized or not financially stable.

Business owners should protect themselves and take care of their employees by ensuring they are compensated on time, as these employees also have financial obligations.

Final Thoughts

Small businesses need to ensure their payroll system’s compliance, accuracy, and efficiency. Problems in this business function can cause costly legal ramifications and employee dissatisfaction. Outsourcing your payroll to a reputable payroll company, such as CRI Payroll Services, is a great way to alleviate these issues for your company.

CRI Payroll Services is ready to assist you and your company. With a full range of HR and payroll-related products, tools, and proper support, CRI Payroll Services can help provide immediate and personalized service to help with many of your Human Resource needs.

For a limited time, CRI Payroll Services will offer two (2) months of free payroll services to help clients ready to make the switch. Take advantage of this opportunity. Contact CRI Payroll Services  to learn more.