Here are the seven most common mistakes we’ve seen small business owners make with all things payroll—from payroll setup to payroll processing and beyond—and how you can avoid getting tripped up by them.
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1. Payroll taxes
This is the biggest and potentially most dangerous mistake you can make with payroll.
In the United States, the government collects payroll taxes on a pay-as-you-go basis. There are a number of different federal, state, and local taxes which may or may not apply to your business. Not paying your payroll taxes can be a huge financial shock to your company.
The IRS reports that over 40 percent of small businesses get fined an average of $845 each year for payroll-tax related issues—the most common we see is missed or late payments.
Your payroll provider should help you figure out which taxes pertain to your business and take care of the complexity of filing and paying the different tax agencies.
2. Employee vs. contractor
An employee and a contractor are very different, especially concerning benefits and taxes. Contractors may make sense for many small businesses because the work is temporary.
But be careful not to misclassify your worker because it could be a violation of labor laws. Misclassifying an employee as a contractor also tends to have tax consequences. Refer to this article to see if your worker is an employee or a contractor, and remember, this is not a choice but an actual legal classification.
3. Exempt vs. nonexempt
The Fair Labor Standards Act (FLSA) regulates how employees are treated on a variety of work-related matters, including payroll. Employees are classified as exempt or nonexempt from FLSA requirements. It’s crucial to this classification right in order to keep records and pay employees accurately—and to avoid penalties and back pay for overtime that should have been paid to a nonexempt employee who was misclassified.
Nonexempt employees must be paid a minimum wage and receive overtime pay for hours worked after the base 40 hours/week has been met, and in some states (like California) overtime pay kicks in if a nonexempt employee works more than eight hours in a day. To be exempt from FLSA requirements, a number of requirements must be met including a minimum salary and a job that is necessary for the business—but where success in the role isn’t tied to hours. Read our blog post about exempt and nonexempt employees for more details.
4. Payroll schedule
How often you pay your employees can have a substantial impact on your operations and cash flow, and also impacts your employees.
The most common payroll frequencies in the U.S. are weekly, biweekly (every two weeks), semi-monthly (twice a month), and monthly.
State laws typically require a minimum pay period—you can always pay more frequently but not less. Each pay schedule has advantages and disadvantages.
Refer to the guide below to help you choose the right payroll for your company and your employees.
If you have Gusto for payroll, we’ll ensure that your schedule is convenient, consistent, and compliant.
5. Gross vs. net payroll
Calculating the gross or net payroll for your employees is challenging because of all the aforementioned payroll taxes. This is a key task for your payroll provider.
Because of these taxes, the true cost of your employee is materially higher than the wages or salary you’ve offered them.
Here is an example of a California hire. This is especially relevant for spot bonuses. Gusto’s spot bonus feature makes it easy to give bonuses to your employees without worrying about the gross vs. net cost. This means if you are giving a $200 bonus to a star performer, your employee can get the full $200 as after-tax (take home) pay.
Understanding gross vs. net is an important component in budgeting for your business and understanding the cost of employing your team members. If you still have questions about how this is calculated, a Gusto team member can help.
6. Providing pay stubs as required
There is no federal law that requires pay stubs, but most states do have their own pay stub laws. These laws include how you provide pay stubs (electronic or paper stubs), whether employees can opt-in or opt-out of electronic delivery, and what information must be included on the pay stub. Also—you guessed it—there are penalties if you don’t follow the rules.
7. Paperwork and records
Even if you and all of your employees happen to reside in a state that doesn’t require you to provide pay stubs to your workers, the Fair Labor Standards Act (FLSA) requires you to keep accurate records about payments to nonexempt employees, including: pay periods, dates and hours worked, and hourly rates—to name a few. Mosey over the Department of Labor’s webpage to read up on all the details.
It’s also important to gather all the necessary new hire paperwork, like W-4s and I-9s, to ensure that your employees are eligible to work in the United States and the correct information (like withholding tax) is entered on your payroll platform.
This article was originally published on April 14, 2016.