9 Payroll Management Areas to NOT Overlook
Payroll mistakes can be an expensive hassle—not to mention certain errors can lead to legal issues. They’re simply a headache no small business wants to deal with.
In fact, the American Payroll Association found that 40% of small businesses pay an average of $845 annually in IRS penalties due to poor payroll management and processes. These errors cost businesses 1 to 8% of their payroll each year. Ouch!
The best way to avoid costly mistakes like payroll tax errors or oversights and employee misclassification is by:
Implementing strong payroll processes
Staying informed about all relevant wage and labor laws
Investing in a reliable payroll team and software
Performing regular payroll audits and reviews to identify and correct errors before they snowball
Let’s dive into nine of the most common payroll mistakes we’ve seen among clients, and how to prevent them.
1. Late Payroll Processing
It’s no surprise that your employees will be less than thrilled if their paycheck is delayed. And if this becomes a regular issue, it will lead to decreased morale, productivity, and possibly even higher turnover rates. Your business’s reputation could be damaged internally among your team and externally among clients, partners, and potential hires.
Even more seriously, late payroll processing can result in legal consequences, including fines, penalties, and potential lawsuits for wage violations. Often, it also indicates underlying cash flow issues within the business, which could be exacerbated if not addressed promptly.
To ensure timely payroll processing, be sure to:
Develop well-defined payroll processes and timelines—from collecting timesheets to processing payments, everything should be completed on schedule
Invest in payroll software that automates functions like time tracking, wage calculations, and direct deposits
Maintain accurate records of employee hours, wages, and payroll deadlines so it’s readily available
Regularly reconcile payroll data to identify any discrepancies or errors that may cause delays
2. Missing Payroll Documentation
Failure to complete or provide payroll documentation can not only lead to legal penalties and employee disputes but can also lead to tax compliance issues—which could open your company to additional audits and repercussions. Plus, inadequate payroll documentation can hinder accurate financial reporting and analysis, so leadership struggles to make informed financial decisions.
Several employee payroll records should be part of your new hire paperwork and should be reviewed and updated regularly. They include:
Employee records: Start by collecting basic information like names, addresses, Social Security numbers, and employment status.
Payroll registers: These documents record employee wages, hours worked, deductions, and net pay for each pay period.
Timesheets: These records document hours worked to ensure accurate wage calculations (more on timekeeping below).
Tax forms: Forms such as W-4 (Employee Withholding Certificate) and W-2 (Wage and Tax Statement) ensure the employee’s wages and taxes are reported and withheld properly.
3. Misclassifying Employees
Two common payroll mistakes we see involve misclassifying employees. The first involves classifying employees as exempt (i.e., exempt from overtime pay) when they should be non-exempt (i.e., hourly employees eligible for overtime pay). The Fair Labor Standards Act (FLSA) mandates that non-exempt workers receive overtime pay when they work over 40 hours per week at 1.5 times their hourly rates. Misclassifying employees can:
Result in overpaying or underpaying them—which means more administrative work, either way
Short the employee of their overtime pay
Subject your company to FLSA-related fines
Another frequent misstep occurs when employers classify someone as an independent contractor when they should be an employee. Since certain wage and benefit laws cover W-2 employees, misclassification errors can expose your business to hefty fines and potential legal action. At the very least, you will have your hands full with administrative work to provide the employee with backpay and other corrections.
Misclassifying team members in any scenario damages employee relations and opens you up to significant legal and financial risk.
Learn more about 1099 independent contractors vs. W-2 employees.
4. Neglecting Timekeeping & Overtime
As mentioned above, accurate timekeeping records are essential to effective payroll management. Poor timekeeping practices can cause incorrect payroll calculations, inefficient workforce management, and low employee morale.
Additionally, it can result in noncompliance with labor laws and regulations regarding overtime pay, breaks, and other labor standards. Note that in addition to paying employees 1.5 times their regular wage when they work over 40 hours in a week, overtime pay must account for:
Working during their breaks
Time spent commuting between work sites
Participating in additional mandatory activities, like training or teambuilding events
A lack of clear insights also makes it challenging to forecast labor costs accurately. This can lead to budget overruns if actual labor costs exceed projections due to improper tracking of employee hours.
Avoid this payroll mistake and maintain visibility into your labor costs by:
Investing in an automated timekeeping system
Training employees and managers on proper timekeeping procedures and the importance of accurate recordkeeping
Establishing clear policies and guidelines for timekeeping (e.g., clocking in and out, recording breaks, and reporting time worked)
Auditing timekeeping records regularly to spot and correct any discrepancies or errors ASAP
5. Ignoring Payroll Tax Obligations
On top of potential legal consequences, penalties, and interest, this payroll mistake could put you and your business at even higher risk. If you neglect your payroll tax obligations, tax authorities could place liens on your company property or assets, levy bank accounts, seize assets, or potentially hold you (the owner) personally liable.
To avoid severe disruption and harm to your company, ensure accurate recordkeeping from Day 1. This means:
Filing payroll taxes on time: You must report the payroll taxes withheld on Form 941 and state payroll tax returns if applicable. These show proof of payroll taxes you withheld and determine how much you must deposit by the federal and state deadlines.
Retaining benefits documentation: Keep records of employee benefit deductions such as health insurance and retirement plans.
Not forgetting extra fringe benefits: Many, like cash bonuses, company cars, and employee discounts, are taxable. It’s up to you to properly identify, classify, and withhold taxes on taxable benefits.
6. Not Complying with Employment Laws
We’ve already discussed the risks of failing to comply with laws regarding overtime pay, recordkeeping, payroll taxes, and employee classification. But there are many wage and labor laws on both the federal and state levels—we get it, they can be complex and overwhelming!
More critical laws not to be overlooked include:
Minimum Wage: While the FLSA mandates that non-exempt employees be paid at least the federal minimum wage, your state may have a higher minimum wage. In this case, you typically must pay the higher rate.
Final Paycheck Laws: Many states have laws governing the timing and manner of final paychecks for terminated employees. Be sure to adhere to these requirements to avoid penalties for late payment.
Meal and Rest Breaks: Knowing your state’s meal and rest break requirements and allowing workers their entitled breaks or compensating them for missed breaks is vital to state labor law compliance.
Form I-9 Compliance: All employers must verify the employment eligibility of every new hire with Form I-9 to comply with immigration laws.
7. Using an Insufficient (or no) Payroll Software
Without a subpar payroll platform—or none at all—you could end up with inaccurate payroll processing, noncompliance risks, potential data breaches and identity theft, inefficient processes, lack of reporting and analysis, and auditing challenges (in the event of an IRS or DOL audit).
This is one of the most common payroll mistakes among small businesses, and as you can see, it’s not worth the risk or hassle! A reliable and comprehensive payroll platform or service is worth the investment to protect your business and mitigate these unnecessary risks. Doing so will:
Streamline payroll processing
Enhance data security
Improve accuracy
Provide you with robust reporting to support informed decision-making
8. Not Offering Direct Deposit
If you’re not offering direct deposit to employees yet, your business will fall behind. First, this feature provides a highly convenient way for your employees to get paid without waiting for a physical check and visiting the bank. Direct deposit can also be helpful for employees by allowing them to divide their pay among multiple accounts, enabling them to manage their finances better and achieve their financial goals.
As for your company, direct deposit eases the payroll process by:
Saving you time and money on printing, distributing, and reconciling physical checks
Offering a secure method of payment to reduce the risk of lost or stolen paychecks and protect sensitive employee information—a benefit for both you and employees
Ensuring labor law compliance, as some states require employers to offer direct deposit or another electronic payment option
9. Failing to Review Payroll Reports
Are you reviewing payroll reports regularly? This is yet another payroll mistake we see from many small businesses. The process involves more than running payroll and issuing checks each pay period. Skipping this step could leave you with more errors, compliance risks, financial losses, and missed opportunities to gain insights for strategic decision-making—all because you aren’t taking the time to review this valuable data.
Instead, make this a part of your payroll management process by:
Establishing a regular schedule for reviewing payroll reports, ideally before each payroll processing cycle
Assigning responsibility for reviewing payroll reports to designated payroll personnel
Thoroughly reviewing payroll reports to identify errors, discrepancies, and trends that may require further investigation or corrective action
Promptly correcting any errors or issues identified during the review process, including adjusting payroll records, issuing corrections, and implementing process improvements to prevent future errors
Streamline Your Payroll Management
According to research by HRDive, all it takes is two payroll errors to cause 49% of employees to search for a new job. So yes, effective payroll management does play a role in employee retention!
And if you’re handling payroll in-house and feeling its administrative burden, it’s no wonder. Another survey found that for some business owners, payroll processing adds up to 21 days over a year.
Implementing strong payroll processes is essential to doing what’s best for your employees and your business. You’ll keep your team happy, remain compliant, and ease the process for everyone involved. And if you want to achieve all that without taking it on yourself, book an intro call with JLS Accounting today! Our payroll team would happily take this entire responsibility off your plate.