Finances and Taxes

The 5 Most Common Payroll Mistakes Small Businesses Make

David Cheng Former Head of Content, Gusto 

Every small business owner will eventually have to deal with payroll as they grow their business.

At Gusto, we work with thousands of customers and frequently, the same questions pop up.

Here are the five most common mistakes we’ve seen small business owners make with payroll, and how you can avoid getting tripped up by them.

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 modern 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.

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 about potentially misclassifying your worker. President Obama initiated an executive order in 2014 to protect against contractor labor law abuses.

This is why classifying your worker is incredibly important. Refer to this article to see if your worker is an employee or a contractor. Remember, this is not a choice but an actual legal classification.

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.

Gusto Payroll Periods

Gross vs. net payroll

Calculating the gross or net payroll for your employees is challenging because of all the aforementioned payroll taxes.

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.

Fall in love with modern payroll

Labor law posters

You may have noticed labor law posters on the walls at some small businesses. This is more than just a courtesy to employees; it’s also the law.

If you’re unsure what you need to post at your office, check out the Department of Labor’s FirstStep Poster Advisor.

Even if your employee works from home, there are rules you have to follow, which can include mailing them a physical copy of the posters or sending them an electronic link. Your state may have additional posters so make sure you’re compliant in your home state.

Updated: November 1, 2019


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