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3 Common Payroll Mistakes Small Business Owners Make 

March 14th, 2024 | 4 min. read

By Melissa Langehennig

As a small business owner, you're juggling numerous tasks daily, but payroll is one area where you can't afford to slip up. When payroll goes wrong, it can lead to frustrated employees, legal issues, and unnecessary financial penalties. You might be unknowingly making payroll mistakes that are costing your business significantly. From ineffective onboarding processes to misclassifying employees, these errors can disrupt your operations and damage your reputation.

At Whirks, we're a small business too, so we understand the critical need to make sure your employees get paid correctly and on time, every time. Our expertise and guidance have saved countless clients from the headaches of payroll errors and compliance issues, ensuring their operations run as smoothly as possible.

We'll get into the three most common payroll mistakes small business owners make, providing you with actionable advice to turn these potential pitfalls into opportunities for improvement. You'll have a clearer understanding of:

  • How to enhance your onboarding process
  • How to ensure accurate tax calculations
  • How to correctly classify your employees

Mistake 1: Lacking an Effective Onboarding Process for New Employees

New Employee Data Collection

Employee onboarding is the first step to building a comprehensive employee record, but it can be tedious and time-consuming. Failure to thoroughly and accurately complete onboarding paperwork, in the beginning, can leave an employer scrambling for missing information when it’s later needed. Similarly, if you don't properly fill out and keep the necessary I-9 forms and related documents, you could face compliance problems and potential fines during an audit.

It can be costly for an employee if the W-4 and other tax withholding documents are not completed accurately or if the employer fails to update the information in their payroll tax calculations. Employers need a clear understanding of what documents must be completed during onboarding, when information needs to be updated, and how long records should be retained. There should also be a clear process for employees to update their information when necessary.  

Integrating Payroll Systems

When updates need to be made, the redundancy of entering the same information in multiple places is frustrating. For this reason, having a system that connects onboarding, record maintenance, and employee benefits is ideal. The time spent developing comprehensive and efficient onboarding processes is well invested, but there is no need to reinvent the wheel. Many helpful tools and software options can streamline onboarding by providing connectivity, electronic signatures, and digital record storage.

At Whirks, we call this Attract & Hire, and it is an especially popular add-on for businesses that are constantly recruiting and hiring. After all, efficient onboarding processes lead to comprehensive employee records that keep a small business owner compliant and free of redundancy. 

Mistake 2: Failing to Calculate Taxes Accurately

Staying Updated on Tax Regulations and Changes

Correctly calculating payroll taxes is crucial to the success of any business, but payroll tax laws are continually changing making it difficult for small business owners to keep up. Miscalculations of federal, state, and local taxes can also lead to penalties and fees. In addition, life events can change an employee’s tax status, and failure to update tax documents can result in inaccurate tax withholding. Once again, there should be a clear process for employees to update tax forms when changes are needed. 

Utilizing Reliable Payroll Software

Manual calculation of payroll taxes is a daunting task that most small business owners would rather avoid. At times, it may be necessary to consult an experienced accountant or payroll specialist. There are a variety of payroll software options that can assist with correctly calculating payroll taxes.  A third-party payroll provider can be a great resource to help you stay compliant with the latest tax laws and avoid penalties.

Mistake 3: Incorrectly Classifying Your Employees

Understanding Classification Criteria

Misclassifying W-2 employees as 1099 contractors is a common mistake for many small business owners. Most of the time the error is unintentional, but some might do it to avoid certain taxes and benefits obligations. Such misclassification can lead to significant legal troubles, including audits, penalties, and back taxes. 

Making the distinction can be difficult, but it is critical to get it right when it comes to federal taxes. The worker classification determines how the worker files their tax return, and how the federal income tax, Social Security, and Medicare taxes are paid. 

How to Determine the Classifications

The IRS recommends a thorough consideration of factors in 3 categories: behavioral control, financial control, and the relationship of the parties. This is by no means a comprehensive list, but here are a few factors to consider in each of these categories: 

Behavioral Control — Measure how much control the employer has over the job details. This includes when, where, and how the work is done, the choice of tools/equipment, and where supplies and services are purchased. 

Financial Control — Consider whether the employer is in control of the financial aspects of the work. Does the worker have a significant investment in the work? Do they have unreimbursed expenses? Do they have an opportunity for profit and loss? 

Relationship of the Parties — Determine what kind of relationship is perceived between the business and the worker. Check if the worker receives any benefits such as insurance, pension, or paid time off, and whether there is a written contract in place.  

Remember, if you determine that a worker is a 1099 contractor, be sure to obtain their completed W-9 before making payments to them. This information will be needed to accurately complete the 1099, and there are penalties for filing 1099 forms with a missing or incorrect Tax ID number. 

Paying your workers has its own complexities, but do you know the best way to pay yourself from your business?

Seek Expertise When Uncertain

If you're unsure about how to classify your workers, we encourage you to consult your HR team or an outside HR professional. At Whirks, we're dedicated to making payroll less of a headache for small business owners. With a bit of guidance, you can dodge those common pitfalls and keep your business on track.

Thinking about changing your payroll provider? It might seem like a big leap, but, it's worth it if you're not on the right path now. To help you prepare for a painless transition, have a look at How to Switch Payroll Services Smoothly.