Running payroll accurately is extremely important. Even small mistakes can result in fines. That’s why you need to be on the lookout for common payroll mistakes.
Common payroll mistakes
Here are 10 payroll errors that small businesses commonly make.
1. Classifying workers improperly
Some workers are independent contractors while others are employees. Mixing up the two types of workers can be a costly mistake.
You don’t have to pay a contractor minimum wage or overtime wages. Also, you don’t withhold employment taxes from their wages. If you misclassify an employee as a contractor, they might miss out on wages and governments miss out on tax revenues.
If you do misclassify a worker, you will have to pay both the employee and employer’s share of taxes, plus penalties and interest. You might also owe back wages to the employee.
How can you know if a worker is an independent contractor or an employee? The U.S. Department of Labor recommends using the six-part economic realities test.
If you aren’t sure how to classify a worker, you can file Form SS-8 to avoid misclassification payroll issues. When you file this form, you request an IRS determination of the worker’s status.
2. Improperly classifying exempt workers
There are two classifications of employees: exempt vs. nonexempt. You do not pay overtime wages to exempt employees. You must pay overtime wages to nonexempt employees when they work beyond 40 hours in a workweek.
If you misclassify an employee as exempt from overtime wages, they could miss out on wages. As a result, you’ll owe them back wages.
To be exempt from overtime wages, an employee must meet Fair Labor Standards Act (FLSA) exemption guidelines. An employee is exempt if they meet all of the following rules:
- You pay them a salary.
- You pay them a minimum of $35,568 per year ($684 per week).
- They have job duties that include great responsibilities that directly affect the company’s operations.
Some states might have more stringent laws about who can be exempt. Make sure you check your state laws.
3. Miscalculating overtime wages
You must calculate overtime wages correctly. Overtime wages are different than regular wages.
If you don’t pay the correct overtime rate, you might owe back wages, penalties, and interest.
The FLSA says you must pay employees 1.5 times their regular rate of pay, also known as time and a half, for any time worked beyond 40 hours in a workweek. For example, if you regularly pay an employee $10 per hour, you will owe them $15 per hour for overtime worked.
Some states and cities have different overtime wage laws. Check your state laws to find out if you must follow more stringent rules.
4. Paying the wrong tax rates
Tax rates change all the time and may cause payroll issues. The rates you used when you started paying employees might not be the correct rates now.
When you pay the wrong rate, you will have to make up the owed taxes, plus penalties and interest.
Make sure you regularly check your employment tax rates. Many tax rates are updated every year. Here are taxes you might need to update your rates for:
- Federal income tax
- Social Security tax
- Medicare tax
- Federal unemployment tax
- State income tax
- State unemployment insurance tax
- Local income tax
Depending on where your business and employees are located, you might need to check your rates for additional taxes.
5. Running payroll late
You must consistently run payroll using the designated pay frequency for your employees. For example, you might have a weekly, biweekly, semimonthly, or monthly pay period.
Your employees rely on receiving regular wages. Failing to pay them might destroy their trust in you. And, not running payroll on time can make you noncompliant with state pay frequency requirements.
Pick a regular pay frequency for your employees and stick to it. If you need to, set a reminder to run your payroll on time.
Run your payrolls with enough time for payments to process. For example, let’s say it takes four days to process direct deposit for payroll. You should run payroll four days in advance to ensure that employees get paid on time.
6-10. Other payroll mistakes…
To learn about payroll mistakes 6 – 10 and how to prevent each error, download our FREE guide: 10 Common Payroll Mistakes You Don’t Want to Make.
Payroll software can help you prevent some payroll mistakes, like miscalculating overtime and paying incorrect tax rates. Use Patriot’s online payroll software to start preventing errors. Get a free trial now.