Accounting & Bookkeeping

Payroll Mistakes That Should Be Avoided

Written by Analytix Editorial Team | December 13, 2021

Processing payroll correctly and free of mistakes can be challenging for small businesses. The owners of most fast-growing firms need to multi-task to ensure the business does not fall behind on deliverables, customer expectations, collections, and even due benefits.

Some of the common mistakes that typically affect manual payroll are explained in brief below:

1. Incorrect categorization

Not taking different pay scales and schedules into consideration can cause businesses to categorize employees incorrectly. Most small to mid-size companies will have part-time or contract employees alongside a few permanent staff, who may comprise owners and founders as well.

Some of the most common payroll mistakes concerning categories of employees can include:

  • Incorrect assigning of wages, especially minimum wage.
  • Not marking the differences between employees such as independent contract workers. Different categories of employees carry different tax payment obligations for businesses.

Action item: Plan payroll ahead of time. Ensure you inform your clients about getting better clarity on worker classification to optimize tax benefits as well.

2. Understanding payroll forms and preventing errors

Payroll can be a complicated process and it can be difficult for businesses, especially those focused on growth, to stay on track with the various forms and documentation needed. Furthermore, if software is being used, human errors can add to the complications in the form of incorrect or incomplete data entries, wrongly filled forms, and incorrect ID numbers entries.

Action item: Research and understand payroll processing, including rules that apply to different workers and tax obligations for the business.

3. Missing bank holidays

Bank holidays for regular bank customers are actually working days for payroll processing by banks. Businesses need to manage their payroll processing around these days to ensure timely payments for employees and staff. If staff is paid at month-end, for example, then holidays such as Christmas and New Year payroll must be planned in a manner such that money can be accessed by employees around the time of holiday. However, for the business, this means they will need to designate a date to ensure payments are processed before or after the bank holidays.

Action item: Plan ahead to ensure employees are paid on time, morale stays unaffected, and there is streamlining of funds for the business as well.

4. Not understanding overtime and the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) outlines the federal minimum wage and other rules such as overtime. These rules govern employee protection and wages. Employees who are protected by FLSA are non-exempt for businesses they are employed with, and are eligible for overtime pay for work done over 40 hours during the week, plus they need to be paid the minimum wage. However, the FLSA does not mandate overtime pay on weekends or holidays; there are other conditions that apply to overtime as well. Employees not covered by the FLSA are exempt and businesses are not obligated to pay overtime to exempt workers.

Conditions such as hourly wages, actual wage, and job duties can affect categorization of employees. Thus, it is important for businesses to stay compliant with FLSA guidelines; failure to do so can lead to penalties.

Action item: Review FLSA guidelines and stay on top of any new rules and legislation. Leverage the help of professionals to ensure compliance.

Streamline your operations: Leveraging professional payroll assistance

Benefiting from tax credits, or the recent COVID-19 related financial assistance, are some of the ways in which small businesses can benefit from well-managed payroll processing.

Leveraging professional assistance such as engaging in a business partnership can help your business assist operations as well as those of your clients in:

  • Understanding differences between categories of employees, such as independent contractors, non-exempt, and exempt workers.
  • Understanding and working according to worker classification guidelines.
  • Filing the correct forms, especially related to worker status.
  • Understanding and applying the correct credits applicable, such as childcare facilities or healthcare insurance premiums.

Next Steps

Written by

Analytix Editorial Team
Analytix Editorial Team

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