6 Small Business Payroll Errors (and How to Prevent Them)

You’d be hard-pressed to find a small business owner passionate about payroll, and we don’t blame you. 

In addition to everything else on your plate that running a small business entails, keeping up on compliance with payroll regulations can be a challenge. 

While a few payroll processing errors may be unavoidable, solving them can be time-consuming and could even cost you cash in the long run. Continually having issues around paychecks can lead to employee frustrations and retention challenges. 

Ready to eradicate your payroll errors? Read on to learn six of the most common small business payroll errors and how to prevent them. 

1. Payment Errors

Payment errors could translate to a bunch of different issues, including:

  • Over or underpaying
  • Missing paychecks
  • Sending extra paychecks
  • Miscalculating payroll taxes

Under or overpaying an employee costs you money and can save precious time as you go back through your books to spot errors. 

Preventing payroll processing errors

The best way to avoid payroll errors is to pay close attention when filing paperwork. However, payroll processing errors are sometimes inevitable. When an error pops up, contact the employee immediately with an error letter for both of your records. 

Creating a payroll manual can be a helpful tool to avoid processing errors in the future or at least establish a protocol for handling errors when they arise. Consider creating a detailed process of all payroll practices, including how parties should handle an error and share it with your employees.

Having a policy in place could protect you in case of legal issues. 

2. Classification

Not all employees are built (or classified) the same. Making errors in employee classification could include coding one employee as an “independent contractor” instead of “employee,” and this error can lead to owing back pay to an employee. 

Misclassification of an employee could lead to over or underpaying. Most commonly, you’ll encounter this error through overtime pay and whether an employee is exempt. This error does violate the Fair Labor Standards Act (FLSA), which states all employees working over 40 hours a week qualify for overtime pay (unless exempt). 

Preventing employee misclassification

Determining employee classification can feel more like art than science. When taking on a new employee, consider their responsibilities and control over the business. The IRS has a helpful guide to determining proper employee classification

3. Overtime

You may under or overpay employees if you’re not tracking employee hours and overtime properly. Not only does this lead to long-term issues with tax reporting, but it can be frustrating for your team in that they may be underpaid, waiting for additional funds, or have to return money if overpaid. 

Preventing overtime errors

Keeping thorough records and encouraging employees to do the same can help avoid errors in hours and compensation. Using tools to help employees log their time accurately can also help take the responsibility off your plate. 

4. Input Errors

Being a small business owner means wearing many different hats, and likely one of your least favorites is being a record keeper. But, if you don’t take the time to keep detailed and accurate records, you’ll create more work for yourself and possibly fall into legal trouble. 

Preventing record-keeping errors

Avoid using multiple systems (like an Excel spreadsheet or pen and paper) in favor of one streamlined system. Make time regularly for record keeping instead of inputting a bunch of information at once, which can lead to errors. 

Also, opt for software that automates the process where it can, freeing up your time for more exciting tasks.  

5. Deadlines

Missing payroll deadlines can lead to frustration across your team. If paychecks are not timely and predictable, you may have difficulty retaining employees. 

On a different note, missing tax deadlines can also make your business suffer. If you file late, you could face late payment fees and regulatory penalties. 

Preventing deadline issues

Automate payroll deadlines using your payroll software to avoid human error when you can. Add calendar reminders leading to important deadlines in cases where it can’t be automated. Consider creating a checklist around these deadlines to ensure you don’t miss details. 

6. W-2s

While it’s one simple form, errors on a W-2 can create cascading issues for your employees and your business. From errors in personal information to withholding elections, even the smallest inconsistency in information can lead to issues down the line. 

What’s more, these errors largely feel out of your hands. As an employer, you ask employees to fill out W-2s independently, meaning you might not be aware of errors even when they submit them.

Preventing W-2 errors

You may not be able to fill out W-2s for employees, but you can offer them resources and support as part of the onboarding process. Instead of hastily handing a new hire the form to fill out as an afterthought, consider explaining the form and walking them through any questions they might have. 

While it takes more time out of your day, filling out the W-2 once correctly will save you the headache of amending errors in the form in the future. 

Conquering common payroll challenges can take time and intention, but you don’t have to do it alone. Check out Get Beyond’s small business solutions to automate many of your business’s operations.  

This article is provided for informational purposes only. Your business’s circumstances, goals, and objectives are unique to your business, so any information or opinions in this blog should not be construed as legal, tax, investment, financial, or other advice.  We urge you to always consult with a professional advisor before making important business decisions.

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