Every business that has at least one worker has to process payroll. Unfortunately, if you don’t do it correctly, there can be costly consequences that could end up hurting your business.

Here are some of the most common payroll mistakes small businesses make.

10 common small business payroll mistakes

Mistake #1. Incorrectly classifying workers

There are two main ways your workers can be classified — employees or independent contractors. If you misclassify your workers, it could end up costing you quite a bit in back taxes, back wages and other penalties.

What’s the difference between an employee and an independent contract?

Independent contractors are self-employed. They provide their own tools and equipment for the job, pay their own self-employment taxes and must submit invoices for their work.

Unlike independent contractors, employees must be paid minimum wage, and you’re responsible for withholding employment taxes on their wages.

Mistake #2. Incorrectly classifying employees

Just as there are two ways to classify your workers, there are also two ways to classify your employees — exempt or non-exempt — which affects time-tracking requirements, overtime wages and more.

Employees who are exempt are not entitled to overtime pay. Exempt employees are salaried employees who receive the same paycheck regardless of whether they work 40 hours a week or 60.

Non-exempt employees are eligible for overtime pay when they work more than 40 hours a week. In some states, non-exempt employees are also eligible for overtime when they work more than 8 or 12 hours in a day.

Mistake #3. Paying the wrong tax rate

Part of what makes payroll so complicated is that tax rates are subject to change. If you fail to keep up with the changes, you may find yourself paying the wrong tax rate.

If you fail to pay the appropriate tax rate, you could end up owing interest, late fees and other penalties on any taxes you owe.

Mistake #4. Paying the wrong amount

A lot of small businesses trying to save money opt to do their own manual payroll processing with spreadsheets and other basic tools. While this may be cheaper, it also leaves you prone to costly mistakes, like paying the wrong amount.

You’d be surprised how easy it is to accidentally add or omit a zero, or otherwise enter the payment amount incorrectly. But, it’s a big error that can come back to bite you in many different ways.

Mistake #5. Failing to pay at the right frequency

The federal government doesn’t have any rules that dictate whether you should pay your employees weekly, biweekly, semi-monthly or monthly. However, certain states do have pay frequency requirements you need to be aware of.

If you fail to meet your state’s payroll frequency requirements, you could end up with fines or other penalties that can be costly.

Furthermore, pay frequency has an impact on your day-to-day operations and cash flow, as well as your employee’s job satisfaction and livelihoods. Make sure to take all of these things into account when determining your pay frequency.

Mistake #6. Paying late or missing a payment

Once you’ve set a pay frequency for your employees, make sure that you stick to it.

Processing payroll late — or failing to process it at all — will have big consequences for your employees, who rely on their paycheck to make their house payments and put food on the table.

Paying late or missing a payment is a big reason for an employee to find another job. Keep your best employees around by making sure that you always pay them on time.

Mistake #7. Forgetting about bank holidays

Speaking of paying on time, one big reason why small businesses sometimes end up paying employees late is that they fail to account for bank holidays when processing payroll.

As far as payroll processing is concerned, bank holidays are not considered business days. Make sure that you’re aware of any and every bank holiday that can impact your payroll.

Mistake #8. Calculating gross vs. net payroll incorrectly

The true cost of having an employee on your team is often more than salary or wages you pay them. If you fail to calculate an employee’s net or gross pay, it could leave you with fees or other penalties from the IRS.

Mistake #9. Failing to keep necessary records

As a general rule, businesses are required to keep payroll records and other associated documents for four years. However, different states have different requirements, and those requirements can change.

Unfortunately, if you fail to keep all of the necessary records, it could end up triggering an audit come tax time.

Mistake #10. Failing to keep up with the changes

From the payroll tax rate you are required to pay to the length of time you have to hold on to necessary payroll records, there are a lot of things to keep track of when it comes to payroll. To make matters even more complicated, these things can and do change.

Even businesses that are diligent about calculating payroll properly and paying right on time can fall victim to changing requirements and laws.

If you fail to keep up with the changes, it can leave you at risk for fines, fees, loss of employees and many other consequences that can ultimately hurt your business.

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