3 Common Payroll Mistakes Made by New Companies

Starting a new company comes with many challenges, and navigating payroll requirements can be a daunting one. For starters, everyone wants to get paid – your employees, you, and the government. Making a payroll mistake can cost you more than money, so it’s important to be equipped with the right tools and know-how to avoid the pitfalls. Here are three common mistakes new companies tend to make with some tips on how to avoid them.

1. Employee Classification. How an employee is classified determines how and how much he or she gets paid. If an employee is exempt, they generally get paid a salary, are typically either executive, professional, or administrative, and they are not eligible for overtime pay. If an employee is non-exempt, they must be paid at least minimum wage at an hourly rate, and they are eligible for overtime pay.

Additionally, some employers may misclassify employees as independent contractors. Generally speaking, a contract worker will have complete control over work hours, they are not dependent on employment with your business for all of their personal income, and they are employed for a limited project. It’s important to do your research before classifying workers so that you get it right the first time.

Misclassifying an employee can result in the underpayment of critical employees, which doesn’t usually go over well with workers. Additionally, payroll tax miscalculations as a result of misclassifications can lead to fines and penalties owed to the government. Not only will you be responsible for paying any back taxes owed for miscalculation of employees, but the Department of Labor may assess a fine for each offense committed, knowingly or unknowingly.

To avoid making this mistake, the first step is to understand the position you’re looking to hire. Analyze carefully the job description you’ve created for the position and determine, based on regulations and laws, how to classify that employee. Ignorance is not an excuse, so do your homework.

2. Errant Payments. Wage garnishments, bonuses, payroll taxes are all part of processing payroll accurately. If you receive notice that wages must be withheld from a paycheck, you must be ready to keep track and stop when the debt has been repaid. Additionally, bonuses must be taxes similarly to a normal paycheck. And if you miscalculate payroll taxes because you are unsure of what taxes you’re responsible for paying, you will likely underpay and be held responsible for those errors.

Payroll taxes include FICA taxes, unemployment taxes, and income taxes. You must understand the tax rates and the amounts that must be withheld. These amounts are subject to changes by the federal government, so staying current on the requirements is crucial. The IRS provides the most accurate resources for understanding the laws that govern payroll taxes and wage garnishments, but it may be helpful to have the advice of a certified public accountant to ensure you’re doing everything correctly.

3. Recordkeeping. It’s clear to see that the crux of so much of this requires excellent recordkeeping. Immaculate recordkeeping is required so that tax deadlines are met, tax season goes smoothly, and if you are ever audited, your affairs are already in order. Failure to keep good records can result in devastating penalties and fines for your business.

To keep disaster at bay, develop a system of regular checks and reviews of your records. Any review should include a thorough analysis of employee information, tax forms, and receipts, and everything should be backed up if files are kept digitally. There are guides available for businesses to give you tips and tricks to ensure your records are in the best shape.

There are so many things to keep in order when starting a new business, and payroll can be one of the more complex aspects. There are guides and helpful documents provided by the IRS to make sure you’re following all of the rules. However, if you’re feeling overwhelmed, it may be prudent to consider outsourcing this particular function to a company better equipped to keep your payroll affairs in order. Keeping your dream alive is possible with the right preparation and guidance