3 Mistakes Small Businesses Are Making on Their Payroll

Small businesses will have to consider all of their payroll options as they grow. When a small business is just starting, owners will work long hours in hopes that one day they’ll be able to hire employees to alleviate many of their long nights and weekends working.

Growth in a business requires hiring new employees to fill the ranks.

But hiring new employees often means that the owner will now need to deal with payroll. As one of the many “hats” that an owner will wear, the role of accountant is one that is the most difficult.

You’re not only paying your employee, but you’ll need to deal with constant law changes and paying the federal and local governments. Errors on your taxes can mean significant fines and additional headaches that owners don’t have time to deal with.

A few of the mistakes that small businesses will make when doing their payroll are:

1. Misclassification of Contractors and Employees

Employee classification is very important, and both classifications are very different. Contractors make sense for many small businesses because they effectively work for themselves.

This means that the contractor isn’t paid for overtime work in the same way that an employee would be paid.

Legally, all employees and contractors must be classified properly to avoid legal issues in the future. A few tips for being able to distinguish if an employee is a contractor are:

  • Is the person working on a temporary basis for a particular project?
  • Can the employee choose their own hours and where they work?
  • Does the employee use their own material or equipment to conduct the work?
  • Does the employee invoice the company, or are they paid a flat fee for the work conducted?

If you answered yes to most of the questions above, the person doing the work is likely a contractor.

Why is this important?

Overtime laws, taxes and benefits are far different for an employee than a contractor.

2. Doing Your Own Payroll the “Old” Way

If you’re still using excel or paper and pencil to do your payroll, it’s time to switch to an online payroll service. The average owner will spend five hours per week doing payroll the old-fashioned way.

And this time is better spent doing anything else.

Hiring an accountant is another good option that will help alleviate time spent on payroll and ensure that you’re following local, state and federal laws. When doing your own payroll, one of the biggest issues is failing to follow-up on new law changes.

Statistically, 40% of small businesses will have payroll-related issues every year that costs them $850 in fines. A payroll software provider, whether on online service or an accountant, will ensure that all of your payroll needs are met and on-time.

When financially possible, playing the role of accountant should be one of the first things that you check off of your “additional jobs” list.

3. Payroll Scheduling Issues and Financial Impacts

Scheduling payroll is very important, and state laws will often have a minimum pay period in which you must adhere to or face fines and penalties. These minimum periods will dictate the longest amount of time that must pass before paying an employee.

If this is a 21-day period, you’re generally free to pay the employee bi-weekly, weekly or on any schedule that you deem appropriate.

Each pay type will have its own benefits and drawbacks. The three main payment schedules followed in the United States are:

  • Weekly
  • Bi-weekly
  • Monthly

Costs are highest for weekly. Monthly is the least preferred but also has the lowest costs and processing time. Workers generally prefer weekly payments, but it’s common to have payments bi-weekly.

The only drawback with more frequent payments is that it leads to less money in the bank for your business. Making acquisitions or important inventory purchases may be difficult when paying employees weekly.

But these are just the start of the issues that small business owners will have with their payroll. If you don’t keep up with the required government deadlines when filing, you may find that you’re paying fines and suffering from severe penalties.

This means that you didn’t file W-2 or 1099 forms on-time. You may also file the wrong forms, causing a major headache for management in the process. All of these small mistakes can be very costly for your business, and this is why most owners will offset their accounting needs to a professional.

Payroll is a task that is best left to the professionals and can cost a business a lot of lost money if not conducted properly.

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