Payroll is a business’s largest expense. It’s also a process with many moving parts. Let’s say, for instance, that you run a small team of 10 people. Each of these individuals have unique salaries, withholdings and benefits. On top of what you pay your employees, your business is responsible for additional taxes, such as Social Security, Medicare and Unemployment.
If you miss a payroll cycle, you risk upsetting your employees. If you lapse on paying your own taxes, you’ll run into fines and penalties. Payroll mistakes aren’t always easy to fix. No matter the reason, the responsibility comes down to you.
Fortunately, many business owners have been in your exact shoes. Companies devote hours to designing payroll systems that work. Why reinvent the wheel? Learn from other business owners to create a payroll process that’s right for your business. Step one means knowing what payroll mistakes to avoid, which, in turn, keeps you from getting potentially reported to the Department of Labor.
Using spreadsheets
Spreadsheets are powerful accounting tools. But, they rely on manual input. More importantly, spreadsheets aren’t designed for payroll. These tools are better for profits and loss statements, on-the-fly calculations, and other forms of record-keeping.
If you’re using Excel to manage payroll, you may be wasting valuable time in your business. You might also be exposing your company to mistakes between the cracks.
Let’s say that three of your employees have babies within the same year. Their benefits and withholdings will change. You’ll need to update your spreadsheets and Excel formulas by hand. At the end of the day, you’re a human. And, human error can expose your business to fines.
Employee misclassifications
Does your business work with independent contracts? If so, be careful that you’re not misclassifying them. Some independent contracts are actually employees, by law. And, misclassifications, especially for on-site workers, can be a common payroll mistake and get your company into trouble.
If your company gets sued, you may owe back-pay for overtime and benefits, as established by the Fair Labor Standards Act (FLSA). You’ll also be responsible for payroll taxes and fines.
To make sure you’re in the clear as a small business owner, it’s best to work with an attorney who is familiar with the laws in your country, state, county and city. One resource that may help is the IRS. Here is an article that explains employee and contractor designations. This excerpt can be found in the article:
“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship. Whether a worker is an independent contractor or employee depends on the facts in each situation.”
Administrative pitfalls
Let’s say that you own a landscaping business that hires workers year-round. Assume that your business is established—you’ve likely been around for 3-5 years.
When you hire a new employee, you need to input employee data into formulas that calculate net pay. Perhaps, you send this data to your CPA or a payroll processing firm.
What happens if the following changes need to take place?
- Tax withholding schedules. Governments update withholding schedules at their sole discretion. You’ll need to change your withholding formulas to comply with the state tax laws.
- Changes to insurance premiums. Your benefits providers may choose to change their premiums. You need to update your system to reflect these changes.
- Retirement contributions. Employees control how much they contribute to retirement. You’ll need to update your formulas and record-keeping processes for each employee.
Imagine keeping track of these line items for all 10 of your employees. Let’s say that your company doubles over the next three years. This can lead to poor record-keeping and payroll errors, with payroll records easily getting out of hand.
Reduce your stress with error-free payroll
One of the most effective ways to avoid common payroll mistakes is to use software. You can set up your processes in a matter of minutes. If you’ve been in business for a number of years, you can also move your data into your new payroll system.
