Common Payroll Mistakes Business Owners Should Avoid

Being a small business owner means you have a thousand and one responsibilities all vying for your attention, as well as employees to keep happy, and maybe in there somewhere, your own life to live.

It can feel impossible to keep up with everything, especially in a landscape of ever-evolving regulations and standards. In order to keep your legal ducks in a row, as well as a happy staff, you can’t neglect payroll.

Employees who aren’t given what they’re due can sour company culture and won’t stick around very long. Potentially more concerning is the federal backlash if you don’t dot your i’s and cross your t’s when it comes to overtime, taxes, and wage mandates. To avoid the headaches and save yourself some time, follow our guide for combatting common payroll mistakes.

Overlooking Overtime

Before you can contend with overtime pay, you have to have an accurate way to track employee hours. Whether this is an electronic clocking system or a manually reported spreadsheet, make sure you have a way to determine how much an employee is working each week. You also need to have a policy outlining what is considered overtime and under what circumstances overtime may be worked.

Once you’ve got a handle on accurate reporting, make sure your calculations are correct. It’s easy to make a mistake with overtime pay — while the concept may seem straightforward, it gets complicated when you introduce salaried employees, bonuses, and independent contractors.

When calculating overtime pay, the standard is time-and-a-half whatever the employee’s hourly rate is. While you must pay this for any hours over 40 each week, regardless of whether or not the overtime was approved, you may take different disciplinary action against unapproved overtime work if your policy outlines it.

There are a few exceptions to your basic calculation. One, exempt employees do not qualify for overtime. For the most part, these are salaried employees making over $24,000 per year. Two, if your employee receives a bonus, this must be factored into their hourly wage prior to using the 1.5 multiplier for the overtime wage. Third, independent contractors are excused from many standard employment benefits, but if you classify employees improperly, it can lead to charges of wage theft.

Avoiding Automation

With so many exceptions to the rules, as well as the math necessitated by bonuses and overtime pay, it’s easy to make a mistake. Some business owners feel more confident processing payroll by hand because they feel that if they oversee every step, they can keep strict attention to detail and catch mistakes.

The unfortunate truth is that human error is more common than computer error in payroll processing. In fact, most computer errors come from the user. There are a handful of programs designed to specifically deal with payroll, overtime calculations, and the associated taxes. The rules built into the software keep wages within the legal lines, and it’s possible to update the software as laws change.

By choosing to use an automated system, you not only decrease the potential for error in your calculations, but you save yourself a lot of time. The first time you set up payroll software, it may feel like you’re letting go of a huge piece of your business, but the time saved and the confidence gained is well worth the growing pains. Depending on the size of your business and the frequency of your payroll schedule, you may end up saving an hour or two a week, leaving you time to pay attention to other pressing matters.

Legal Laxity

Overtime laws aren’t the only ones you have to pay attention to when processing payroll. Minimum wage rates, break mandates, and taxes can all trip you up.

Minimum wage is federally mandated and must be posted in the workplace, generally in the form of a labor law poster that your business will receive every New Year. If you don’t receive one, you are required to purchase one and hang it in a visible area. You will also need a poster with the state labor laws, which may include a higher minimum wage than the federally enforced one. Wages must comply with the higher of the two standards (thereby meeting both requirements).

The poster will also denote labor laws regarding paid and unpaid breaks. Federal law does not require employees to be provided with breaks, though many states have stricter requirements for breaks and shifts. It is important to not short your employees their paid breaks, though monitoring employee time is a difficult and touchy subject and must be approached carefully.

Finally, payroll requires state and federal taxes to be paid at various points throughout the year. Some taxes must be submitted monthly while others are quarterly. If you use automated payroll software, you will likely have reminders to submit each set of taxes. If you don’t, consider setting a reminder in your calendar to fulfill tax submission requirements, as back taxes and interest can add up quickly.

Be Diligent

The world of payroll introduces a lot of concepts to keep track of within your business, and a lot of unexpected places to get in trouble. Keeping up with laws and changing regulations through state and federal websites will be crucial.

Staying up to date on taxes and wages will not only keep your business out of trouble, but will also keep your employees happier. When your internal culture is focused on trust and positivity, you’re less likely to find yourself losing money to unproductive employees or experiencing high turnover, both of which are detrimental to business growth.


Devin Morrissey

Devin has been a dishwasher, a business owner, and everything in between. It took him a while to settle on a dream, so he tried out everyone else's to varying degrees of success. You can find him in Daly City or on Twitter, whichever is closer.