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Small businesses face many challenges, such as funding and building a customer base, but payroll doesn’t have to be one.
One of the most important things a small business can do to keep their employees happy is to stay on top of their payroll.
Read on to learn about the most common payroll and payment mistakes.
1. Employee Classification
One of the most common small businesses’ payroll mistakes is the failure to classify employees properly. Some small businesses might not have the budget to keep on full-time employees, so they also have independent contractors.
While businesses pay their employees at least minimum wage as required by law, they don’t have to do so for independent contractors. Also, employers don’t have to withhold employment taxes from the wages of independent contractors.
If you classify an employee as a contractor, it could mess up with their wages and cause government issues when they file their tax returns.
Employers also have to keep in mind that they will be responsible for paying the taxes, penalties, and any interest if they misclassify an employee. Not to mention, employers will also have to pay back wages if they misclassify an employee as a contractor.
2. Exempt vs. Nonexempt Workers
Once you have differentiated your employees from contractors, you should classify employees either exempt and nonexempt.
If you classify an employee as exempt, then you don’t have to pay them overtime wages. However, you will have to pay nonexempt workers overtime if they work more than 40 hours in a week.
Before you classify an employee as nonexempt, you should follow the specific guidelines. You must pay the employee a salary or at least $35,568 per year. Also, they must have great work responsibilities that can affect the company’s operations.
3. Overtime Wages
If you have nonexempt employees and they work overtime, it’s important you calculate their overtime properly. Otherwise, you will be responsible for paying back wages, penalties, and interest.
When a non-exempt employee works over 40 hours in a work-week, you will have to pay them 1.5 times their rate. For example, if you pay an employee $10 per hour and they work 45 hours, you will have to pay them $15 per hour for the 5 overtime hours they worked.
4. Tax Rates
As a small business, you should be careful how you calculate the tax rates when you do payroll. It’s essential you pay the correct tax rates or else, you will be subjected to other penalties and interest.
To avoid this issue, you should always stay on top of the tax changes in your state. Keep track of the following to avoid any payroll errors:
- Local income tax
- Social Security tax
- Medicare tax
- Federal income tax
- State income tax
While these are some of the most common, some states also require you to pay state unemployment insurance tax.
5. Missing Deadlines
Small businesses have a lot on their hands, but they cannot afford to run payroll late.
Because your employees rely on their income, it’s essential you establish a consistent payroll schedule. If you run payroll even a day late, there could be delays with the banks, and your employees might not receive direct deposit on time.
Aside from becoming a huge inconvenience for them, if you’re inconsistent with the payroll, they could lose faith in you. Also, you might fall out of compliance with the pay frequency requirements implemented by your state.
To avoid payroll delays, keep a consistent calendar, and always process it on the same day. You can either choose to pay your employees weekly, biweekly, semimonthly, or monthly. As a rule of thumb, if you offer direct deposit, you should process payroll four business days in advance to avoid any delays.
6. 1099s Forms
If you have independent contractors doing work for your business, you need to ensure you send out the proper tax forms.
According to federal law, any independent contractor that earns more than $600 in a year, should receive a 1099 form. The deadline for you to send the 1099 form is January 31st of the following year.
To avoid any delays, it’s important you add your independent contractors to the year-end schedule process. Learn more about the form 1099-NEC and what it can do for your business.
7. Record Keeping and Data Entry
A big payroll mistake small businesses make is not keeping updated records. If a new employee joins your business, it’s essential you enter all of their information correctly.
Data entry is a really important component of payroll management. You don’t have to spend a lot of money on a data entry system, but it has to be accurate.
You also need to make sure you keep clean and extensive records of all of your current and past employees. If a past employee has an issue with their hourly wages, you should be able to pull up the records from that time period.
Rather than keeping paper timecards, switch to an electronic time and attendance program to ensure all of their time gets recorded properly.
For any business, payroll is a delicate subject that requires a certain level of confidentiality. Ensure that all employee payroll files are confidential and reserved only for the payroll and upper management departments.
To ensure no one else has access to employee payroll information, ensure only those authorized have access to the files. Your employees rely on your confidentiality to protect their information.
9. Not Backing Up Your Files
As we mentioned before, it’s important you keep extensive records and keep them confidential, but you should also back them up.
Many people learn the hard way that storing things on their computers doesn’t help if the system crashes. For this reason, it’s important you backup all of your files. Look into storing all of your business documents on the cloud to protect them.
Small Business Payroll and Payment Mistakes to Avoid
Now that you know about all of these payroll and payment mistakes your small business should avoid, it’s time you put them to the test.
Remember to classify your employees, learn about tax rates, stay on track of overtime wages, and more.
If you want to learn more useful tips about business and more, check out the rest of our blog.