Table of contents
Mistakes — they happen to the best of us. But it’s probably best not to make them with payroll. Unfortunately, there’s quite a bit that can go wrong. So before you bring on new employees, it’s a good idea to familiarize yourself with the basics of payroll and labor laws.
To help you make sure you don’t slip up when doing your payroll, we’ve outlined the most common mistakes below — and how to avoid them. (Remember, this post is for general guidance. For advice specific to your business, be sure to consult with a professional.)
Setting up your payroll incorrectly
Taxes are some of the more complicated and important aspects of payroll. You need to make sure you withhold the right amount of taxes from your employees’ paychecks and understand how much you, as an employer, have to pay as well. To get it right, sign up for a payroll service (like Square Payroll, which is now available in California), hire an experienced accountant, or do it yourself using online resources from the federal, state, and local government. Check out this step-by-step guide by the SBA for guidance on how to set everything up.
Falling behind on tax payments and filings
Again, taxes. Depending on the amount of payroll taxes you collect, your tax deposits may be due monthly (most common), biweekly, or even the next day — review the requirements here. If your state or city collects income taxes too, check with them to confirm due dates. Late payments may come with penalties and accrue interest, so follow submission guidelines and get your payments in on time!
Also, make sure you plan ahead and register your business well before taxes are due. Get federal, state, and local payroll tax identification numbers, as applicable, so you can pay the government and submit filings on time.
The Fair Labor Standards Act (FLSA) establishes that you have to pay people a premium (aka more) for overtime. But calculating overtime can get tricky since you may have to follow state and local wage and hour laws if they’re more favorable to your employees. For example, if you live in California, overtime isn’t as simple as “anything over 40 hours in a week.” Daily overtime (one and a half times the regular rate of pay) and double time (twice the regular rate of pay) rules apply as well. The Department of Labor has a handy guide to help you look up rules in your state.
Running payroll too late
As a small business owner, you’re always busy. But you need to make sure you don’t let your employees’ payday slide by. Forgetting to process payroll leads to unhappy employees and potentially costly mistakes. You could underpay or overpay an employee if you rush through payroll processing, end up having to spend extra time making corrections, and even face fines. These can be easily avoided by using a payroll service to remind you of deadlines and catch mistakes.
Another tip: Depending on whether an employee quits or gets fired, there are a number of states that require employers to give the departing employee his or her final paycheck in a fairly short amount of time — sometimes the very same day. Even if you don’t expect any employees to leave, be prepared by checking the rules in your state.
Forgetting to keep records
Whether you’re a big company or a small business, “audit” is a word that’s dreaded by almost everyone.
In the unfortunate situation that this should happen, meticulous business records will help you get through it — especially payroll records. You’re required to have your payroll records for at least the last three years. Some states require businesses to keep them even longer, so check with your state labor office. The documents you need to hold on to vary from state to state, but they typically include I-9s, W-4s, timesheets, and payroll files (tax forms, pay stubs, etc.).
You have to integrate payroll into your books. After all, it has a direct impact on your cash flow. Knowing how much money you have available at any given time tells you how much you can invest in your business and your employees. Don’t want to deal with it? Get a good bookkeeper or hire an accountant.
We hope this helps you dodge any major payroll problems that might come your way. For state-specific guidance, visit your state labor office’s website.
Square Payroll makes this all a whole lot easier. Learn how to put it to work for your business.