5 common payroll pitfalls and how to avoid them

At first glance, running payroll looks like a pretty straightforward task. After all, what could go wrong? You calculate hours worked, subtract taxes, and write the checks—easy peasy. Or, so it seems…

Once you get started, you may find the process isn’t quite so simple. You’ll want to look out for (and avoid) some common mistakes—because even a minor misstep can lead to unhappy employees and serious fines. 

Below, we’ll review frequently made payroll blunders, so keep reading to be sure you don’t fall into these traps.

1. Missing deadlines

Your employees expect and deserve to be paid on time. Late payments may lead to disgruntled employees, HR headaches, reputational damage to your company, and even lawsuits.  

If you’re already paying your employees on time, don’t skip this section quite yet; you still need to pay the government. Payroll taxes are time-sensitive and subject to strict deadlines. Missing a deposit or filing late—even by a day—can come with fines and penalties, along with interest that can add up quickly. If you want to draw attention from the IRS (and let’s be real: who does?) the quickest way to do so is to submit late tax payments. Make no mistake: you are legally obligated to withhold and remit payroll taxes and to submit your quarterly estimated taxes on time. To ensure you never miss a deadline, see the monthly Gusto Compliance Calendar.

2. Neglecting to abide by overtime rules 

The Fair Labor Standards Act (FLSA) is a law that, among other things, requires employers to pay non-exempt employees 1.5X their regular rate of pay for any extra hours worked (extra hours are any hours worked beyond 40 within a work week). This is known as overtime compensation and it’s due within the same pay period it is earned. 

This can get complicated because circumstances vary drastically across roles and industries. Want a few examples that demonstrate complexities? Calculating overtime may not be straightforward if: an employee works a different number of hours each week, does piece rate work, or if shift differential pay has been accrued.

Additionally, certain states have state-specific overtime laws that supersede federal regulations. 

Avoid mistakes by being crystal clear on the rules and understand how to calculate overtime for each member of your team.

3. Misclassifying workers 

Workers who are misclassified could be denied workplace benefits and legal protections, and their employers may be subject to fines and lawsuits. It’s critical to understand how to correctly categorize and report each member of your team. 

There are two primary ways to misclassify workers: 

• Mixing up full-time employees and independent contractors (or vice versa)
• Mixing up exempt and nonexempt employees (or vice versa)

Let’s get into it: the IRS defines the difference between an employee and a full-time worker and dictates that they be treated differently when it comes to a) the amount of control the employer has over the worker, b) benefits, and c) compensation processes. For example, full-time employees are eligible for certain benefits (like health insurance) and are subject to certain rules and control (like the hours when they are expected to work), while independent contractors are allowed more flexibility but are ineligible for certain protections and benefits. 

Additionally, employers are expected to pay taxes on behalf of their employees, while independent contractors are responsible for their own tax reporting and submissions. To delve into how to make the distinction between full-time employees and independent contractors, read this guide. 

Similarly, it’s important to be clear on the distinction between exempt and nonexempt workers. Exempt employees are excused from the rules in the FLSA, which means they don’t receive overtime and may not be entitled to a minimum wage.

To correctly classify your employees, be sure to read through the guides linked above in this section and complete the tests outlined by the DOL. 

4. Miscalculating final paychecks

Calculating an employee’s final paycheck can get a little hairy. While the federal government has no laws about final paychecks, most states do. For example, in New York, when an employee quits, they are required to receive their next paycheck on the next payday, but in California, they must receive it within 72 hours. This means you may have to run an off-cycle paycheck for a departing employee. 

States also have a variety of laws when it comes to paying out accrued vacation days, so check out this state-by-state guide. 

Neglecting to follow these rules could come with fines or legal consequences so be sure you understand your state and local laws on how to navigate employee exits. 

5. Doing payroll manually 

Here’s the deal: it’s certainly possible to do payroll yourself, and many small business owners start out this way. However, the increased likelihood of human error makes you highly susceptible to risk and potential penalties—there’s simply no way around it. Even minor errors can lead to costly consequences like fines and employee churn. 

The challenges involved in keeping up with ever-changing tax laws and compliance regulations can quickly become overwhelming, especially without dedicated HR or accounting support. 

Additionally, handling sensitive employee data without proper security measures exposes your business to privacy risks, and the time spent sorting through spreadsheets and double-checking calculations is time taken away from growing your business. In the long run, manual payroll becomes not only inefficient but also a risky and unsustainable method for managing your workforce.

How to avoid payroll errors

Payroll mistakes are easy to make but expensive to fix. Whether you’re a small startup or a growing business, it’s vital that you prioritize payroll accuracy to remain compliant and foster trust in your leadership. 

What’s the solution? It’s simple. Use payroll software that guarantees compliance (like Gusto) to feel confident that your employees are being paid accurately and on time. You can get set up in  minutes and breathe easy knowing that your payroll taxes are automatically filed, benefits and time tracking are built in, and you can run unlimited pay cycles. 

Consider signing up with Gusto for stress-free, super simple payroll and get your first 6 months free if you’re a Bluevine customer.