Payroll might seem straightforward at first glance, but even one small misstep can lead to big financial and legal headaches. Whether you’re running a team of five or fifty, payroll mistakes can cost your business time, money, and employee trust.
According to an Ernst & Young report in 2022, payroll errors cost small businesses an average of $291 per mistake to fix. Plugs, payroll mistakes lead to IRS penalties averaging $1,000 annually for 40% of small to medium-size businesses in the U.S., claims SurePayroll.
Common Payroll Mistakes
Here’s a breakdown of the most common payroll mistakes small business owners make—and how to steer clear of them.
1. Misclassifying Workers
One of the most common errors is misclassifying employees as independent contractors, or vice versa. This affects tax withholdings, benefits, and compliance. Avoid it by:
- Understanding IRS guidelines on employee vs. contractor classification.
- Reviewing job roles and contracts annually.
- Consulting with a payroll or HR professional when unsure.
Hypothetical Example
Smith & Co., a small manufacturing company, classified a freelance designer as an independent contractor. However, she worked fixed hours, used company equipment, and reported to a supervisor—meeting IRS standards for employee status. After an audit, Smith & Co. faced back taxes, penalties, and legal fees totaling over $12,000.
2. Missing Payroll Tax Deadlines
Failing to submit payroll taxes on time can result in penalties and interest charges from the IRS. Avoid it by:
- Setting calendar reminders for all federal, state, and local tax deadlines.
- Using automated payroll software or a payroll service to handle calculations and filings.
- Ensuring you have enough cash flow set aside each pay period.
3. Inaccurate Employee Records
Incorrect or outdated information can lead to errors in pay, tax filings, and year-end reporting. Avoid it by:
- Regularly updating employee addresses, Social Security numbers, and withholding forms.
- Encouraging employees to review their pay stubs for errors.
- Conducting quarterly audits of your records.
4. Failing to Keep Payroll Records
The law requires employers to keep detailed payroll records for a minimum number of years (typically 3-4). Avoid it by:
- Backing up digital records securely.
- Keeping paper records organized and easy to access.
- Establishing a record retention policy.
5. Not Tracking Overtime Correctly
If you have non-exempt employees, you’re required by law to pay time-and-a-half for overtime hours. Avoid it by:
- Understanding federal and state overtime rules.
- Using time-tracking software to capture accurate work hours.
- Training managers to approve and document overtime.
6. Doing It All Yourself
Trying to manage payroll on top of everything else can lead to errors and burnout. Avoid it by:
- Delegating payroll to a trusted bookkeeper or payroll provider.
- Using cloud-based tools that reduce manual input.
- Investing in expert help when rules change, or your team grows.
Simplify Payroll
Payroll isn’t just about paying your team—it’s about doing it right, every time. Mistakes can be costly, but the good news is they’re avoidable. At HireEffect, we help small businesses simplify payroll, stay compliant, and focus on growth.
Let’s make payroll stress-free. Contact us today to learn how we can help your business avoid these common pitfalls.