Running payroll is an extremely important job, and it’s critical that you maintain accuracy in the process, as even little mistakes could end up having big consequences.
Many small businesses have their owner or another person in-house without much bookkeeping or accounting experience performing payroll tasks, which opens the company up to a greater likelihood of payroll mistakes. Here are just a few examples of some of the most common such mistakes:
- Improper classification of workers: Some workers are employees of the company, while others are independent contractors. A failure to classify these workers correctly could result in some financial blows. With a contractor, you do not have to follow the same rules about minimum wage or overtime and do not withhold employment taxes. This means if you classify a contractor as an employee you’ll accidentally cause yourself to lose money, but if you misclassify an employee as a contractor they’ll miss out on some wages and tax benefits that are their right.
- Overtime wage mistakes: You are responsible for correctly calculating overtime wages. If you do not pay the proper overtime rate you could be forced to pay back wages with interest, as well as penalties for violating the Fair Labor Standards Act. Any employees who work more than 40 hours in a workweek are afforded the right of earning 1.5 times their regular pay rate.
- Paying improper tax rates: Tax rates frequently change, and if you’re using the wrong tax rates this could wreak havoc on your payroll. You must stay up to date with the proper tax rates, because if you pay the wrong rates you’ll be required to pay back the taxes you owe, plus interest and penalties.
- Late payroll: Depending on the way you’ve set up payroll for your company, you might run payroll weekly, biweekly, semimonthly or monthly. Your employees rely on receiving their wages in a timely manner. A failure to pay your employees on time will damage the trust they have in you and your business, and could also result in you be in penalized for failing to comply with state requirements for pay frequency. In addition, make sure you give the payments enough time to process. If you know it’s going to take several days for direct deposit to be processed, make sure you run payroll in advance so your employees get their money on time.
- Gross versus net: It can be difficult to calculate gross and net payroll for employees because of payroll taxes. The actual cost of your employee is actually higher than the wages or salary you give them, because of the existence of those taxes. You might also have bonuses to consider. With all of these factors to consider, it’s easy for untrained bookkeepers to get confused and make mistakes with the books.
A skilled professional bookkeeper will avoid making these mistakes and help your company stay financially healthy. For more information about mistakes you should avoid with your payroll, contact us at MCG Solutions.