6 Common Payroll Mistakes and How to Avoid Them

If you run a business, you’ll know the importance of payroll. Payroll is making sure that your business keeps track of how much to pay your employees.

It is one of the smoothest transactions that your business will be involved in.

But there are also costly mistakes that can be made which will severely harm your business.

So what are these common payroll mistakes that your business needs to avoid?

We’ve put together this detailed guide to help you out.

The Guide to Common Payroll Mistakes

Whether you have already begun your business or are thinking about establishing one, you need to make sure you don’t make these elementary mistakes with your payroll.

Here’s what you need to know:

  1. Keeping Records

Simply sending a paycheck or direct deposit every other Friday isn’t sufficient for payroll.

For example, it is crucial to create pay stubs for your employees. These pay stubs will show the gross income that your employee has earned. It will also show how much tax money has been withdrawn from the payment.

Additionally, it will show additional features such as hours worked, overtime hours (if any), and the pay period.

These are crucial in case there are any discrepancies in reported income from you or from your employer. Not keeping an accurate record of how much the business has paid out to its employees can lead to problems in the future.

  1. Incorrectly Classifying Employees

It’s also important that you correctly classify the people who work for your business. While you may categorize all of them as ’employees,’ it’s imperative to learn about the different types of employment.

But there are different legal obligations with regard to full-time employees, part-time employees, and contractors.

For example, you will not have to withdraw taxes for your contractors. It is their responsibility entirely. Depending on your jurisdiction, you may not have to provide any workplace benefits such as healthcare to your contractors.

Full-time workers and part-time workers will have their own obligations for the business to fill. You want to make sure that you understand where each worker fits in so that you follow the correct obligations. Your payroll records should show what type of employee each worker is.

  1. Pay the Correct Wages

This may sound obvious but you have to make sure you don’t make any errors with paying your employees their correct wages.

For example, if your employees earn an hourly wage you must make sure that they are being paid at least the minimum wage in your jurisdiction. If your employees work overtime, you must be aware of what the overtime laws and wages are.

It is also important to always calculate the hours worked correctly. Ideally, there should be a way for your employee to check how many hours they have worked so that there is no discrepancy.

If your employee is given a raise, this needs to be immediately communicated to the payroll department. It is the responsibility of the payroll department to promptly update this information in the system so that the employee earns their higher wage henceforth.

  1. Don’t Miss the Payroll Deadlines

Not meeting a payroll deadline is again a huge mistake and is sadly commonplace. But it is possible to miss a deadline due to the various steps needed in the payroll process.

Your jurisdiction may also have strict laws regarding the payment of wages, so you must make sure you are always complying. You also know that by failing to obey these laws you not only jeopardize your business but you also lose trust from your employees.

Payroll deadlines don’t only concern paying an employee’s wages. It also includes paying your company’s payroll taxes. This latter responsibility must be adhered to otherwise there are serious consequences for your business.

These consequences can include penalty fees and additional legal troubles. You need to always be on top of your payroll obligations; creating a calendar is ideal for this.

  1. Tax Forms

A major responsibility of the payroll department is to send out tax forms to employees at the beginning of the year. Whether its a 1099 form for your contractors or a W2 form for part-time and full-time employees, your company has an obligation to meet these requirements.

These forms are needed for your employees and contractors to file their tax returns. Failure to comply not only causes a tremendous inconvenience for them but also can incur legal troubles for your company.

Before sending out the tax forms, you need to make sure that the information is accurate. You want to make sure that your company has also fulfilled its tax obligations correctly.

Just as you need to make sure that you provide your employees to receive their wages and pay stubs, you need to make sure they receive their tax forms on time. You should confirm their address with them if you are going to send the forms via mail.

  1. Bookkeeping and Software

Keeping records doesn’t only include how much to pay your employees, but it also means that you have to make sure that you are always on top of your records.

Often, an employee can be overpaid or underpaid due to poor bookkeeping. We suggest that you hire a bookkeeper (or a team of bookkeepers) as a separate position within your payroll department. They should keep accurate records of how much cash flow is coming into the company and how much to pay each employee.

You also need to make sure that the bookkeeper is made aware of any changes to an employee’s wages. You also want a responsible bookkeeper who can notice any irregularities in the cash flow and whether this can cause issues in paying employees.

You will likely want to invest in bookkeeping software and payroll software for your company. One of the biggest mistakes in payroll is not doing research on the best software and hiring professionals who are not competent with particular software.

Make sure to hire a bookkeeper and payroll professionals who know the software or are willing to learn.

It’s Pay Day!

Now that you know the common payroll mistakes to avoid, you’ll be better equipped to handle payroll for your company. Make sure to always use this guide as a checklist so that you’re always on track.

Be sure to read more great content on frugality and making better business decisions.

 

 

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