5 Common Mistakes during Payroll for Small Business

Article By: Carol Anderson


5 Common Mistakes during Payroll for Small Business

Accurate payroll management is very important for business to run smoothly otherwise you will be subject to various fines. So it’s better that you have a look at some of the common mistakes and avoid them later so that you can have better payroll management system.

Common payroll mistakes

So here is the list of five common payroll mistakes that small business owners usually make:

1. Improper classification of workers:

Usually there are two types of workers in any organization. They are employees and independent contractors. If you are doing an improper classification of employees then it can be a costly offer.

For contractor, you don’t need to pay minimum or overtime wages.  Contractors are not subject to the employment taxes. If an employee is improperly classified as a contractor then he might be missed out on wages or government taxes.

As a penalty, you need to pay employee and employers share of taxes with interest, along with additional penalties. You need to pay additional wages to employee.

In case, if you have a query for classifying a worker, you can file Form SS-8 to avoid any further issues.

2. Classification of exempt worker in an improper manner

Employees can be classified as:

  • exempt
  • non-exempt

Exempt employers aren’t subject to overtime wages. Nonexempt employees are subject to additional wages if they work more than 40 hours in a working week.

If mistakenly, you classify employee as an exempt employee then he isn’t subject to overtime wages and you owe him wages back.

To be exempt from overtime wages, employee needs to stand by Fair Labor Standards Act Guidelines. Following are the qualities of an exempt employee:

  • They are salaried
  • Their minimum wage is $24,600 per year.
  • Their work responsibilities include directly affected company’s operations.

Check the laws of your state before going deep into it.

3. Confusion in calculating Overtime Wages

Calculating overtime wages should be done correctly. Calculation of Regular wages and overtime wages is different. If the overtime wages aren’t paid correctly then you owe back the wages, penalties along with interest rates. As per FLSA, overtime wage should be at least 1.5 times of the original wage. These laws are different based on states and cities. So it’s better to check your state laws.

4. Submitting wrong tax

Changing tax rates may cause payroll issues. The rates at the time of hiring employees may not be the current rates.

If you make payments at the wrong rate of interest, you need to compensate for outstanding taxes, penalties and rate of interest.

Be constantly updated about current employment tax rates. Number of tax rates is modified each year. This is the list of taxes you need to be updated about.

  • Federal income tax
  • Social Security tax
  • Medicare tax
  • Federal unemployment tax
  • State income tax
  • State unemployment insurance tax
  • Local income tax

Depending on where business and employees are located, you need to be aware about current rates.

5. Late Payroll

Consistently running payroll is necessary at designated pay frequency for your valuable employees. Pay period can be weekly, biweekly, semi-monthly or monthly. Employees are dependent on their wages. If you don’t pay them on time, it might destroy their trust in you. Running payroll late can make you non-compliant with state pay frequency rates.

So select a regular frequency for payment and follow it on time. If needed, you can surely set a reminder for payroll.

Payments should be done with enough time for payment process. Online Paystub is the best place for generating paystubs online.

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