CHAPTER 3
Tips to Avoid Common Payroll Challenges
If you're doing payroll right,
you’re not spending a lot of time thinking about it. But as with any complex process involving calculations and the government, you will inevitably run into bumps along the way that demand your attention. Here are some common payroll pitfalls with tips on how to avoid them.
Misclassifying Employees
Sometimes it’s an honest mistake. Regardless, flubs like classifying a full-time employee as an independent contractor or denying overtime to non-exempt salaried staff are violations of the Fair Labor Standards Act (FLSA). And the penalties can be steep. To protect your business, take a moment to familiarize yourself with the U.S. Department of Labor’s classification guidelines.
Tip: If you have control over when your employees work, they are not independent contractors. Plus: Many salaried employees are entitled to overtime. Either familiarize yourself with the FLSA guidelines or use a professional payroll provider, who should already know them and best advise you.
Sloppy or Incomplete Records
The Fair Labor Standards Act (FLSA) requires employers to keep three years’ worth of pay records. That means hours worked, payment rates, overtime earnings per week, and the date of every payroll. Sloppy or incomplete records could mean big, expensive headaches down the road.
Tip: Make sure you always have a backup method of payroll records. Today’s technology can help keep payroll records organized through online or electronic record keeping. Consider implementing, and frequently auditing, an automated time and attendance system, and that syncs to an electronic payroll record to coordinate payment records and pay stubs.
Missing Federal Deposit Deadlines
You must deposit your federal taxes on specific dates, but those dates are partly determined by the total taxes you report on Form 941. File late and you can end up with fees of up to 25% on certain payments.
Tip: Familiarize yourself with the Federal Employment Tax Due Dates, and ask your tax preparer for a list of all your deadlines for the coming year.
Failing to Comply with State, Federal, and Local Laws
At least 10 federal payroll laws have changed in recent years; several states have recently adopted sick-leave mandates; and minimum wage requirements have a way of sneaking up on you. These changes make it easy to miscalculate your tax obligations or fail to file a required form—particularly if you employ people across multiple states or jurisdictions.
Tip: Either follow the national business press for changes to federal regulations or subscribe to a service that does it for you (ADP’s Eye on Washington offers free email alerts). Your state’s branch of the Small Business Administration can connect you to local resources. Always ask your accountant to explain any new laws that affect your business.
Failing to Report All Taxable Forms of Compensation
Payroll taxes aren’t limited to income. Most fringe benefits like stock options, achievement travel, and employee discounts are subject to federal income and employment tax withholding, too. These forms of compensation must be reported to the IRS, or you could face significant penalties.
Tip: Assume that any benefit not listed in the IRS’ Fringe Benefit Exclusion Rules is subject to the usual taxes.
Sloppy Integration
When your timestamps are on paper and your hourly rates are on spreadsheets, loading your payroll amounts can be a chore, and mistakes can happen. Greater integration of the payroll process—from time and attendance to tax payments—means fewer opportunities to make expensive errors.
Tip: Remember to ask how well an outside payroll service will integrate with your current HR and management systems before committing to one.
Misprocessing Garnishments
There are different rules for different kinds of employee garnishments (fines, taxes, child support, etc.). Failure to comply could result in fines, and employees may struggle to retrieve payments that were processed in error.
Tip: Use scheduling software or a professional service to help automate these payments as much as possible.
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