Running a business presents great opportunities for success that includes profits, providing gainful employment for others, and contributing benefits to the local community.

But when business is not conducted properly in just one area, it can negatively affect many people and throw the entire organization out of sync. One of those segments of business that must be done right or bad things can happen is payroll. Payroll mistakes can be costly, and it’s not just a matter of shorting an employee a few bucks or not making payroll on time. For example, failure to implement federal and state payroll laws can put business owners at risk for over-withholding or under-withholding income tax—a serious offense. Or, underpaying state unemployment taxes, erroneously ceasing child support withholding, or incorrectly calculating fringe benefits are just a few of the mistakes made by small businesses on a regular basis.

In fact everything, from filing all necessary government forms to paying taxes on time, payroll is one of the most challenging tasks in business. According to the Internal Revenue Service (IRS), 33% of employers make payroll errors, costing billions of dollars annually. In addition, the American Payroll Association found that there’s an error rate of between 1-8% of total payroll in companies that use traditional timecards, and a whopping 40% of small businesses incur an average of $845 a year in IRS penalties as a result of mismanaged payroll processes.

5 Most Common Mistakes

In order to avoid expensive penalties and the backlash of disgruntled employees, become familiar with the following five of the most common payroll mistakes businesses make:

1. Taxes-Probably the biggest, and potentially most dangerous mistake you can make with payroll is not handling taxes properly. Not paying Uncle Sam has heavier consequences than most other payroll mistakes. You can mess up a lot of things, but missing sending the government its share can be very costly for your business.



2. Employee vs. Independent Contractor-Businesses are notoriously mis-labeling employees as independent contractors, and independent contractors as employees. This can be a very costly mistake. Penalties can be very high, especially when you consider all the back pay, benefits and fines a business can incur when the independent contractor should have received the same benefits as an employee, but didn’t because of mis-classification. To get it right, learn about the rules established by the IRS.

3. Scheduling Payroll-Most State laws typically require a minimum pay period. You can always pay more frequently to your employees, but not less. Each pay schedule has advantages and disadvantages and how often you pay your employees can have a substantial impact on your operations, cash flow, and your employees.



4. Record Keeping and Data Entry-Keeping track of your payroll through proper data entry and good record keeping is essential. Businesses make so many record keeping mistakes regarding payroll every year that the Social Security Administration has set up a special telephone hotline to verify them. Sloppy record-keeping can lead to both overpayments as well as government penalties levied on your business.


5. Handling Child Support, Levies, and Garnishing-Some of your employees may have to pay child support or already have a court order on them to have their wages garnished. It is not up to the employees to make sure this court order is followed, but the person handling payroll for the company is responsible for sending these payments to the appropriate recipient. Paying especially close attention to detail to this area can save you money as well as headaches.

Outsource Payroll

Avoiding these five common payroll mistakes is easier if you have a professional service handle your company payroll for you. Worksite Pay provides complete payroll processing, offering automated direct deposits for full- and part-time employees with variable pay frequencies, weekly, bi-weekly, both hourly and salaried non-exempt employees. Worksite Pay can customize the payroll service to fit any size business.

Johnny Duncan is a business writer and consultant partnering with business leaders to provide workforce management solutions including leadership coaching, customer service training, people-to-job matches, and conflict resolution.  He can be reached at or by visiting