Having your own business means handling all of the tasks that you used to simply delegate to a company when you worked in the corporate world. One of these tasks, often overlooked by small business owners, is payroll processing. Handling payroll on your own is not only time-consuming, but it can also create mistakes and oversights that can lead to serious legal issues down the road. In this post, we’ll cover six mistakes you make when you handle payroll on your own.
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1. Not Updating Federal Laws
If you hire a small staff, you might assume that some regulations don’t apply to you—but they do. In addition to paying employees as little as possible and capping off their hours at 40 per week, not adhering to regulations can lead to serious monetary penalties for your business. Keep an eye out for changes in federal law, as well as local regulations that could apply if your staff lives or works in a different state from where you do business. For example, a bill introduced by lawmakers in Washington State would require employers who contract with Washington state agencies to pay their workers a living wage of $15 per hour.
2. Not Calculating Taxable Wages
If you pay your employees under $1,000/month, then calculating and filing payroll taxes is your responsibility. If you’re paying them more than that—even just a little bit more—then it’s best to use a payroll service to take care of those details for you. It’s easy to forget about these legal requirements and end up with an unexpected fine or penalty, costing you more time and money down the road. Using payroll software will ensure you never overlook such an important detail again.
3. No Separate Wage Statements
Employees are protected by wage statement laws that require employers to provide employees with a statement of earnings, hours worked and deductions made. These are typically given to workers with their paycheck, but if your company issues them via email, you’re not in compliance with state law. (California law requires you include how much money was withheld for taxes.) If you handle payroll yourself but don’t provide these statements, you could be liable for employee claims of unpaid wages. It’s also possible that employers may decide to take legal action against people who don’t comply; in some cases, they’ve had success in small claims court.
4. Not Tracking Employees’ Hours
One of the most common mistakes business owners make when they handle payroll is simply forgetting to track hours. While it might seem like a trivial matter, having an accurate count of hours worked affects more than just payroll tax contributions. Many businesses have hourly employees who are paid based on performance rather than being tied to a salary, so tracking their time can help you evaluate their effectiveness and efficiency. Not paying your employees correctly hurts your business’s reputation with both your staff and any future job applicants. Plus, if you are not documenting hours properly, you could be at risk for wage theft, where an employee files suit against your company for not paying them all earned wages in accordance with legal requirements.
5. Wrongly Calculating payroll
This is a common mistake that can end up costing you hundreds or thousands of dollars each year. When calculating payroll, you need to take into account all your obligations as an employer. This includes things like income tax withholding and social security payments, not just things like salaries and bonuses. It also includes paying superannuation, which is essentially insurance for employees in case they can’t work anymore due to illness or injury. If you’re handing out super to employees, then you have to provide it. And if your employees are being taxed on their own contributions—as opposed to being paid salary packaging—then they might be more inclined to roll over some of their money so they don’t have to pay extra taxes.
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6. Not using payroll software
Properly documenting employee time and attendance is key to ensuring you receive accurate paychecks. It’s also critical to your business operations. If you don’t use payroll software, chances are your employees aren’t using proper time-tracking methods—or worse, they’re gaming the system. As a result, you might end up paying too much or too little in taxes or making costly errors that could lead to penalties from the IRS. Instead of taking these risks with your hard-earned money, hire an accountant who can help ensure things are done correctly. Not having good bookkeeping systems: Using payroll software is only step one of what should be a multi-layered approach to bookkeeping tasks.