Owning a business, especially after being someone's employee, can be very rewarding. You're the captain of the ship and can chart your course without having to answer to anyone else. When you get to the point where you need your own employees, however, it’s vital to realize that being an employer can be complicated - especially when it comes to payroll. To ensure the best chance of success, be certain you avoid these three common payroll pitfalls.
As a new employer, you certainly have a lot on your plate. Even though you're juggling a lot, always remember these three blunders:
1. Failing to Pay Payroll Taxes
We're listing this first because of the severe penalties involved. Brand-new small business owners may mistakenly think that failing to pay payroll taxes is akin to not paying personal income taxes. This is a hazardous error.
If you get in a cash pinch, DO NOT delay paying your payroll taxes as a stopgap measure.
The US Department of Justice says the following about withholding payroll taxes (trust fund money), then not turning the money over to the IRS:
“An individual’s failure to comply with employment-tax obligations is not simply a civil matter. Employers who view amounts withheld from employee wages as a personal slush fund, treat withheld employment taxes as a loan from the government that can be repaid if and when they see fit, or whose business model is based on a continued failure to pay employment tax, are engaging in criminal conduct and face prosecution, imprisonment, monetary fines and restitution. According to statistics provided by IRS Criminal Investigation, in the 2015 fiscal year, individuals convicted of employment tax crimes were sentenced to an average of 24 months in prison.”
So, unless you fancy a 24-month "vacation," pay those payroll taxes - no matter what.
2. Inaccurate Time Cards
Manual timekeeping systems (i.e., when team members enter hours on paper timesheets) are exposing you to errors that could be both deliberate and unintended. Employees can enter their prescribed starting time even when arriving late and do the opposite when leaving early (welcome to clock creep). Even your most trustworthy employee can have trouble accurately recalling hours when filling out a time card several days afterward. Erroneous time cards increase labor costs unnecessarily and burden your HR staff (which may just be you), who then have to spend time correcting the time cards.
Paying employees a few minutes here and there for time not worked can really add up. Consider the following example. If you have 25 staff members making $10/hour who estimate their hours with an additional 8 minutes of time each day for which they were not on the job, you will overpay:
As the number of employees goes up, so does your lost cash.
3. Misclassifying Employees
It's tempting for an employer to define an employee as an independent contractor. In most cases, employers are not legally instructed to withhold and pay Social Security, unemployment and Medicare taxes for money paid to workers classified as independent contractors. Furthermore, employee classification affects a host of other things including benefits eligibility, minimum wage provisions, overtime pay eligibility and workers' comp. Employers who misclassify are at risk of state and federal penalties and should, to be safe, always consult the comprehensive DOL guidance on the subject. The nature of an employer-employee relationship can also evolve over time and alter the classification. It’s important to review the relationships periodically.
Now that you know these payroll mistakes, how do you avoid them? Get help! Automated solutions for timekeeping, payroll, hiring/onboarding and more can help you keep on top of paperwork and employee time reporting. Need help staying on top of the latest labor regulations and best practices? Services like HR On-Demand deliver updates right to your inbox, and even provide on-call HR support 24 hours a day. Get the help you need and avoid these payroll mistakes.