Mistakes happen at any mid-market company, but when it comes to payroll, these mistakes can be extremely costly. Just one small error could result in the loss of thousands of dollars, along with employees’ time and energy when they attempt to fix the problem.
Thankfully, if you learn about these mistakes, you can avoid them in the first place. Here are seven costly payroll mistakes many mid-market companies make, as well as tips you can follow to ensure they don’t happen to you.
1. Not having a salary structure in place
Looking at the overall plan for your payroll and setting up a salary structure for your employees is critical. Creating a salary structure once is not enough; you need to update salary structures on a regular basis and analyze whether you’re paying employees the right amount.
For instance, if you’re paying too little, you’re not going to be able to attract and retain talent, and if you pay too much, you’re going to put yourself out of business. Looking at the health of your business, your employees’ salaries, and current labor market conditions once a year – or at least once every few years – is going to ensure that you’re not making any costly mistakes.
2. Misclassifying employees
Your company may hire full-time, salaried employees, along with seasonal, part-time, and 1099 employees. Some employers may purposefully misclassify what should be a full-time employee as an independent contractor in order to evade paying out benefits, worker’s compensation, and unemployment.
If discovered, this could lead to a costly lawsuit for an employer. It recently happened to Uber, which expected to pay $146 million to $170 million in settlements because of misclassification issues with their workers. Making sure that your company is correctly classifying your employees and following the law is going to save you from a massive headache in the long run.
3. Failing to add or remove employees from benefit plans
When you hire on new employees, are they added to the benefits system right away, or after a short trial period? Once they quit or are laid off or fired, are they taken off benefits immediately? Decide how soon you’ll enroll and remove employees from benefits plans and make sure it is done in a timely manner. Otherwise, you’re either not properly compensating your employees or you’re compensating former employees who don’t deserve it.
4. Making data entry errors
It’s only expected that humans will make errors sometimes. But when it comes to data entry input for your payroll, these errors can be expensive. Having HR double-check their work as well as call up the IRS to verify employees’ names and social security numbers is crucial when hiring on new employees.
5. Not following compliance laws
Compliance laws can be complicated and are subject to change at any time. If you’re not on top of these changes, it could end up costing you money. Included in compliance are things like tax reporting and withholding, guaranteeing employees’ eligibility to work in the United States, fulfilling laws for salaries and hourly wages, and withholding garnishments.
In addition, you need to make sure you’re compliant with overtime law, you’re paying at least the minimum wage, you’re not breaking child labor laws, and you’re keeping your payroll records on file for at least three years. Your HR department should know these regulations, as well as all the ins and outs of the Fair Labor Standards Act, to ensure you are fully compliant.
6. Forgetting to use the Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a tax credit available to companies that employ workers from targeted groups that have faced difficulties finding jobs. If you employ people within a targeted group and you’re not taking the tax credit – which can be a few thousand dollars per employee per year – then you’re making a costly payroll error. Some examples of targeted groups include a qualified veteran, a qualified IV-A recipient, an ex-felon, a summer youth employee, a long-term family assistance recipient, a Supplemental Nutrition Assistance Program (SNAP) recipient, and a qualified long-term unemployment recipient.
7. Not sending in paperwork at the proper time
When you’re managing payroll, you have to make sure you’re staying on schedule in terms of your taxes. Sending in your paperwork late can result in big fees, especially if you have a large number of employees. For instance, if you turn in a 1099 late, you will have to pay $50 per late form if it’s less than 30 days late, and $100 per form if it’s more than 30 days late. Keeping on top of tax schedules and getting everything in before the due date is going to save you big.
Now that you know the costly payroll mistakes to avoid, make sure you have the best HR team and tools in place. Only then can you ensure that you will successfully function when it comes to payroll.