Aside from sales, payroll might be the most important operation in your entire business. Unfortunately, it might also be the most complex. Not only do you need to balance all your workers’ different wages and schedules, but you also need to account for taxes, benefits payments, garnishments and more — and you need to do all of this every couple weeks, so your workers have the money they need to survive.
It should come as no surprise that most employers get payroll wrong at some point. Here are the most egregious payroll mistakes explained, so you can determine whether you are doing your workforce dirty.
You Aren’t Listing Important Items
It might seem like a small issue, but what you print on each payroll receipt is important. This information tells your employee what you are paying them for and what you are taking out of their wages for what reasons. Your employees should be able to double-check all this data to ensure you aren’t paying them too little (or too much). Some critical items you should always include on pay stubs include:
- The total hours worked during the pay period
- The start and end days of the pay period
- The employee’s legal name or business name
- The employer’s address
Additionally, you should have enough space on your payroll template that allows you to include and explain things like overtime pay (more on that later), commissions, bonuses or premiums for meals or rest periods. You should consider organizing your paystubs online, so you can modify the template with greater ease.
You Aren’t Calculating Taxes Correctly
When you don’t have the right information on your paystubs, you aren’t likely to know whether you’ve calculated everything correctly. While getting your workers’ pay wrong will cost you time — because you have to fix your mistake — calculating your business’s taxes improperly will cost you excessive amounts of money.
A failure to withhold the right amount of state, federal, unemployment, Medicare and social security taxes will result in severe penalties. For example, according to the IRS, a failure to file all necessary taxes results in fines of between 2 and 15 percent above what you owe, depending on how long it takes you to catch your mistake. This puts strain on your business, which in turn stresses your employees. If you are struggling to understand payroll taxes, you should outsource the task to someone who knows more than you, like an accountant, HR professional or payroll firm.
Your Payroll is Always Late
You might be busy, but payroll should always be a top priority. When your payroll is consistently late, your employees will be demotivated and reduce their performance. Worse, when you are rushing to meet a deadline that has already passed, you are more likely to make major mistakes that increase your employees’ ire and open you up to fines from the government.
Short of outsourcing payroll completely, this process will always demand some of your time. However, you can set up a payroll service to remind you of deadlines and help you catch mistakes.
You Aren’t Counting Overtime
Even some salaried employees can work overtime, and they should be compensated appropriately for it. You should know which employees are exempt from overtime pay, and you should know what your state and local laws are with regards to overtime premiums. For instance, in California, there are weekly and daily overtime laws, which means if a non-exempt worker clocks in for more than is permitted, you will need to offer overtime or double-time pay. It might be wise to schedule a meeting to explain to employees what their overtime status is, so they can reorganize their work schedules accordingly and make your payroll efforts somewhat easier.
You Aren’t Keeping the Right Records
When one payroll period is complete, you shouldn’t forget about it forever. You need to keep records of your payroll, so you can use it when tax season rolls around — or so you can use it in the event of a legal dispute with employees, the government or some other entity. You don’t have to keep every detail of your payroll indefinitely, but you should use the following guide when organizing your records:
- Documents to keep for two years: Merit increases and pay grade
- Documents to keep for three years: Hiring documents, 1-9s, time cards, employee handbook, FMLA leave details, termination information
- Documents to keep for four years: Paystubs, tax documents (like W-4s or 1099s)
- Documents to keep for six years: retirement income and 401k plan details
Payroll is a chore — and it always will be. However, by using tools available to you and knowing as much as you can about the payroll process, you can make payroll an easier experience for you and your employees.