Many small business owners elect to process their payroll in house without considering the risk of mistakes in this area. For those who are not ready to outsource their payroll yet, here are some of the most common payroll problems.
- Setting up payroll incorrectly. If your payroll is set up incorrectly from the beginning, then it will be harder to get things corrected in the future. This can include not updating your State Unemployment Insurance Rate every year and making sure deductions such as 401K, health insurance, HSA deductions, etc. are set up as either pre or post tax deductions.
- Salaried employees don’t have to be paid overtime. Just because an employee is paid a salary rather than an hourly wage doesn’t necessarily mean they are exempt from overtime. The employee’s status as exempt or non-exempt from overtime determines whether or not the employee has to be paid overtime. Some examples of employee categories exempt from overtime include: outside salespeople; computer technicians; executives; administrators; professional employees; and employees that make over $100,000 per year.
- Counting hours in base 10 instead of 60 minute increments. If an employee works 8 hours and 56 minutes, this should be reported as 8.94 hours not 8.56 hours. It sounds like an obvious mistake but the minutes add up over time.
- Overtime is a weekly calculation, not per pay period. The most common pay period is every two weeks and many employers calculate and pay overtime for hours worked over 80 instead of viewing each week separately. Overtime occurs when a non-exempt employee works more than 40 hours in any week.
- Interpretation of independent contractor rules. If a worker fits the following criteria they are considered an independent contractor: the worker controls his own coming and goings; the worker controls how he does the job; if the worker is available for others to hire for the same job; and if the worker uses his own tools to perform the job. If the worker does not fit all the above criteria, then he is considered an employee of the company and is subject to payroll taxes.
- Employers not having a company policy in writing. No matter how small your business is, you should have a policy handbook that details the company’s rules and guidelines. One critical element of your handbook is your company’s policy on vacation pay upon termination of employment.
- Submitting payroll deposits late or incorrectly. How you submit your tax deposits will vary from business to business depending on variables such as entity type and annual liability. Knowing the requirements for your business is essential in complying with deposit requirements.
Payroll mistakes, whether large or small, can result in big, often costly, consequences. Statistics show that roughly 40 percent of small businesses incur an average of $845 a year in IRS penalties and many hours to correct mistakes.