September 28th, 2021

3 Common Payroll Mistakes & How to Avoid Them

Payroll is an essential part of any business. It requires ongoing tracking and administration. But common payroll mistakes can lead to costly compliance issues for businesses. Specifically, under the Fair Labor Standards Act (FSLA), workers are protected when it comes to their wages. Employers who don’t comply with the FLSA can face steep penalties.

Business leaders and HR professionals should be aware of the payroll process and potential problems. So here are the three most common payroll mistakes and how you can avoid them. 

1. Not paying employees on time or correctly 

For starters, it’s illegal to pay your employees late. But sometimes mistakes happen, and unless it was willful nonpayment — one instance shouldn’t be too much cause for concern. But accidentally missing a payment due to human error or payroll system problems too frequently can put your business at risk. If done repeatedly, this kind of payroll mistake is likely to result in a lawsuit. 

Paying employees too much or too little can also lead to issues for employers. State regulations differ on what you should do if you end up paying an employee the wrong amount, but in general, you should act quickly. Contact the employee about the payment error right away and inform them of what you’re doing to fix the mistake (i.e. payroll deduction or payment on their next paycheck). 

2. Misclassifying workers

As defined by the IRS, employees can be: 

  • An independent contractor
  • An employee (common-law employee)
  • A statutory employee
  • A statutory nonemployee
  • A government worker

In most cases, employers work with independent contractors or employees. But an employee can be exempt or nonexempt and the distinction between the two is where another payroll mistake can happen.

Nonexempt employees are entitled to overtime pay for hours worked beyond the standard 40 hours, with most overtime pay being time and a half. Not paying nonexempt employees correctly could result in lawsuits. And though there are exceptions to overtime pay, it’s best to fulfill those wages since it can vary by state. 

Classifying independent contractors is also critical for payroll. Based on common-law rules under the IRS, businesses should weigh a variety of factors when determining whether a worker is an employee or independent contractor. However, most of it will be driven by whether they have behavioral and financial control over a worker and the type of relationship. 

If classified incorrectly, employers will be held liable for any employment taxes not paid to an independent contractor who should have been paid as an employee. 

3. Not being compliant with federal and state wage and hour laws

On a federal level, businesses have to file appropriate tax forms each year (W-2s to employees and 1099s to independent contractors). And they must follow overtime and payment based on the classification of employees outlined above. Under the FLSA, employers must keep three years of pay records on file — but this can also vary by state. With varying state wage and hour laws, it’s a lot for businesses to keep up with. 

For example, in Colorado, the Colorado Wage Act addresses deductions from wages, vacation, commissions, bonuses, final pay, pay periods and paydays, and pay statements. Wage and hour laws continue to evolve in Colorado as well. Just recently, a court ruling changed the landscape so that use-it-or-lose-it vacation policies are no longer compliant. 

How to Avoid Common Payroll Mistakes

If you’ve had more than one instance of not paying your employees on time or correctly, consider a payroll service that tracks your employee hours and automates the process for you. If you’ve had issues with classifying employees or getting compliant — a solution outside of a standard payroll service may be better. A local expert that is aware of state wage and hour laws will go a lot further in supporting your HR needs than just a payroll service or platform. 

All of these mistakes can lead to costly compliance issues, from penalties and interest charges to lawsuits. While many businesses choose to handle payroll themselves, for smaller businesses it can become a burden. And using payroll software is usually the go-to solution, but can be difficult to learn and manage. Working with an HR partner can reduce your liability and make payroll processing easier.

Obsidian HR’s certified payroll specialists manage all your payroll activities in one convenient platform for you — protecting your business and removing the burden of payroll. But we also provide workers’ compensation, risk and compliance support, healthcare options, and more. To get started, reach out to us today

Download Our eGuide: 2021 Colorado Laws & Regulations

New employment laws and regulations in Colorado went into effect on January 1, 2021. Understand what the new laws mean for your business — and what's happened throughout this year.

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