The Most Common Payroll Mistakes Small Businesses Make

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When a business is getting off the ground and starting to pick up speed, one of the first challenges it will face is hiring. If you’ve been operating as a team of one, the prospect of bringing someone else on board can be daunting. 

How do you pay them? What about taxes? 

Adding another team member (or several) will increase the amount of back-office work you’ll need to do, but there’s no reason to be intimidated by the process. Once you’ve got the basics down, you’ll be ready to run payroll like a seasoned pro. To help, we’ve compiled a list of some of the common payroll mistakes companies make when starting out. 

Know The Difference Between Contractors and Employees

Companies who need some help around the office will often ease into hiring by bringing in contractors to work on specific projects. While they may hang around the office some, it’s important to understand the differencesbetween contract employees and those on your payroll full-time. 

The biggest difference between contractors and employees is taxes. For salaried employees, you will be responsible for withholding tax money from their paychecks and sending it on to the government for things like income tax and social security. Come tax time, a W-2 form will outline exactly how much was paid to the employee and how much was withheld, and your employee will use it to pay their personal income taxes. 

Contractors, on the other hand, are responsible for paying taxes on their income throughout the year themselves. At the end of the year, you’ll provide them with a 1099 form, outlining how much you have paid them, which they will use on their business or personal returns. Unlike employees, you are not responsible for managing the withholding process. 

Pay Attention To Payroll Taxes

When it comes to paying taxes, what you pay and whom you pay will depend on your location. There may be federal, state, and local tax requirements that your company will need to abide by. 

They tend to fall into these categories:

  • Medicare tax
  • Social Security tax
  • State unemployment insurance tax
  • Federal income tax
  • Federal unemployment tax
  • State income tax
  • Local income tax

Missed payments can be costly. So spend some time researching and understanding your specific tax requirements. The IRS website is a great place to start. 

Establish a Payroll Schedule

Do you plan to pay your employees weekly, bi-weekly, or once a month? For most businesses, payroll is the biggest expense each month—by a long shot. When you choose to pay employees, therefore, can have a big impact on your cash flow. 

Do all of your outstanding accounts receivable tend to roll in toward the end of the month? If so, a once-monthly payment may be the way to go. Of course, there are also industry norms and employee expectations to consider. Some employees may not be able to wait until the end of the month to be paid. So analyze your cash flow and get to know your potential team’s needs before making a decision. 

Get Overtime Right 

If you’ve ever worked retail on a holiday, you know the sweet feeling of receiving time-and-a-half payments. But as the employer, you now need to understand the rules around overtime pay and make sure that you’re following them to the letter. If you don’t pay your team correct rate, you might owe penalties, back pay, or interest. 

According to the government, after 40 hours, your workers get 1.5 times their regular pay for every hour spent. This does not apply, however, to your full-time salaried employees. Instead of being paid hourly, they are paid a salary based on the skill level and amount of work expected of them. 

Big companies often rely on enterprise solutions, coupled with a payroll staff, to administer payment to employees and oversee the tax obligations that go with it. If you don’t have the same resources at your disposal, don’t fear. There are several payroll providers out there, and you’re sure to find one that will meet the needs of your business, just as it is. 

Learn more about administering payroll through ScaleFactor or check out our roster of payroll partners.

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