Effective payroll management is one of the most essential parts of operating a successful business. It's a complex process that, if mishandled, can result in serious legal repercussions, fines, and reputational harm. Payroll responsibilities go beyond the distribution of paychecks; they encompass a range of regulatory compliance and detailed record-keeping that can be confusing.
As you prepare for the year ahead, it’s the perfect time to review your payroll processes and ensure your business has an efficient payroll system in place. This will help ensure compliance, foster employee trust, and ultimately contribute to the overall health of your business.
To navigate the complexities of payroll, many small business owners turn to partnerships with professional employer organizations (PEOs). These organizations have expertise and specialized tools designed to streamline the payroll process and maintain compliance and efficiency. However, if you’re determined to tackle payroll alone, there are a few common errors you should be aware of.
Common Payroll Mistakes To Avoid
Employee misclassification is one of the most frequent pitfalls employers make. Employee classification is a framework used to categorize workers, which in turn dictates their pay structure and tax obligations. This classification also plays a role in determining eligibility for company benefits and differentiates between U.S. citizens and non-citizens.
Under the Fair Labor Standards Act (FLSA), employers must categorize their employees as either exempt or non-exempt. Exempt employees typically receive a salary and are not subject to overtime and minimum wage laws. In contrast, non-exempt employees are paid hourly and are entitled to overtime pay and minimum wage protections. Misclassifying employees can result in over or underpaying your staff. Additionally, it can cause issues when determining if an employee receives benefits and overtime.
In addition to exempt vs. non-exempt classification, another error is classifying an individual as an independent contractor rather than an employee. This misclassification can be costly as you will have to make back payments or other adjustments to rectify that employee's pay. This not only affects the financial aspect of a business but can also have legal and reputational consequences.
Hourly tracking and overtime
Overtime compensation (1.5 times the regular pay) is mandatory for the following:
- Employees clocking in more than 40 hours per week
- Work performed during designated breaks
- Travel time spent moving between job sites
- Participation in activities beyond usual work hours, such as team-building events, training sessions, or other company-sponsored activities.
For non-exempt employees, meticulous tracking of work hours and any overtime is a legal obligation. Without close monitoring, you risk over or underpaying your staff, leading to a lengthy and complex correction process. It can also be uncomfortable for employees who might have to repay the company.
Poor record keeping
Keeping accurate records is a must for any business, especially regarding payroll. Under the FLSA, employers must keep accurate pay records for at least three years. These records should include specifics such as the number of hours worked, pay rates, and the dates of each payroll period. It's a critical step to maintain compliance with labor laws and ensure everything's squared away if any questions or issues arise down the line.
Miscalculations
It’s critical to double-check your team's pay. Ensure you have the right tax rates, calculate overtime correctly, and understand how deductions should be applied. Payroll errors can be a hassle, but by taking the time to ensure everyone is paid correctly, you can save yourself a lot of headaches later on.
Inaccurate paperwork
Employees must complete W-2 forms to ensure accurate documentation of benefit withholdings, 401(k) plans, and health spending accounts (HSAs). Employees rely on their W-2s to file their annual tax returns; even a single mistake can lead to considerable complications and annoyance for you and your employees. Ensuring the accuracy of these forms is crucial for a smooth tax filing process.
Missing deadlines
According to Form 941, employers must make payroll tax payments periodically throughout the year. The frequency of these payments, whether monthly, semiweekly, or on the next day, depends on your total payroll amount and how long your business has been operating. Make sure you understand which depositor category applies to your business and adhere strictly to the corresponding deadlines. Neglecting to meet these payment obligations can result in substantial fines and legal consequences, which could be detrimental to your business.
Garnished wages
It's important to understand that not all wage garnishments are handled in the same way. Obligations such as fines, taxes, and child support each have their own set of rules that can vary by state. You must adhere strictly to the instructions given by the issuing authority, such as the Internal Revenue Service (IRS), a state tax agency, or the U.S. Department of Education.
Incorrectly handling your employees' wage garnishments, such as neglecting to file or filing improperly, can have serious consequences. You could face legal judgment against your business that requires you to pay the total amount of the employee's debt, meaning this isn’t something you can afford to mismanage.
In addition to the common mistakes mentioned here, there are many less common mistakes we haven’t covered. So, it's essential to keep a watchful eye over your payroll practices. Ensure you have robust systems in place and stay up-to-date on new laws and regulations in your area to remain compliant. Set yourself up for success next year by conducting a detailed review and audit of your payroll operations.
How GMS Can Help
For small business owners, managing payroll and tax filings can be one of the most time-consuming and challenging tasks. Through expert payroll management services, GMS can save time and give you peace of mind.
We seamlessly blend proprietary technology with dedicated HR services and support from our expert employees. We offer:
- Payroll processing
- Payroll software
- Payroll tax management
- Employee self-service
Stop spending time worrying about payroll and start spending time growing your business. GMS is more than just another payroll management company – we’re a PEO that provides comprehensive HR solutions to solve your payroll and other administrative issues. Contact us today!