Running a small business means wearing many hats. One of the toughest and most time-consuming tasks? Payroll.
Many small business owners try to save money by managing payroll themselves or using minimal help. But this often leads to costly mistakes – not just in dollars, but also in employee trust. According to the 2023 IRS Databook, about 33% of employers make payroll errors, costing billions every year. These errors can distract you from what really matters: growing your business.
Here are the top five payroll mistakes small business owners commonly make – and how to avoid them.
1. Misclassifying Employees and Contractors
A very common and expensive error is mixing up employees and independent contractors. The IRS has clear rules for each.
If you misclassify, you might withhold the wrong taxes, miscalculate benefits, or pay incorrect Social Security and Medicare amounts.
This can lead to thousands in back taxes, penalties, and even legal trouble.
2. Inaccurate Time Tracking
Payroll accuracy starts with tracking employee hours correctly.
Small business owners sometimes skip reliable timekeeping systems, especially for hourly and overtime work.
This leads to either underpaying or overpaying employees, which can cause dissatisfaction or disputes.
3. Missing Payroll Deadlines and Tax Reporting
Payroll has strict deadlines – for paying employees and submitting payroll taxes to federal, state, and local agencies.
Even a one-day delay can bring costly fines and interest charges.
Also, forgetting to report bonuses, benefits, or other non-wage compensation can cause compliance issues.
4. Overlooking State-Specific Payroll Laws
Payroll laws differ widely by state.
Whether you operate in one state or many, you must stay up-to-date on things like minimum wage, overtime rules, workers’ compensation, and paid leave.
Ignoring these can result in fines and audits.
5. Poor Recordkeeping
Good payroll records are key to accuracy, compliance, and handling audits or disputes.
Unfortunately, many small business owners neglect this.
The Fair Labor Standards Act requires keeping pay records for at least three years, and some states have even stricter rules.
Why It Matters
Payroll mistakes can drain your money, damage employee trust, and distract you from running your business smoothly.
Correcting errors, responding to audits, and paying penalties all cost time and resources you can’t afford to waste.
How to Avoid These Mistakes
The best way to protect your business is to get professional help.
Bay Area Accounting Solutions (BAAS) offers expert payroll services designed for small businesses. We handle the complex details so you can focus on growing your business – with confidence and peace of mind.
Don’t let payroll errors hold your business back. Invest in reliable payroll solutions today.