Small Business Owners: 7 Common Payroll Pitfalls (and How to Avoid Them)
Payroll isn’t just about cutting checks — it’s a critical business function with serious compliance responsibilities. For many small business owners, staying on top of shifting tax regulations, labor laws, and deadlines can feel overwhelming. But payroll mistakes are more than administrative slip-ups — they can cost you money, damage employee trust, and invite regulatory penalties.
Here are 7 of the most common payroll pitfalls — and what your business can do to stay in the clear.
1. Misclassifying Workers
Trying to save on taxes by treating employees as independent contractors? Be cautious. Misclassifying workers can trigger audits and result in unpaid employment taxes, benefit liabilities, and hefty penalties from the IRS, DOL, and state agencies.
✅ Avoid it: Base worker classification on the level of control your business has over the person’s work. When in doubt, consult with a professional — federal, state, and local rules can vary widely.
2. Miscalculating Pay
Overpaying, underpaying, or missing details like retroactive adjustments or leave pay can cause frustration for employees — and stress for you.
✅ Avoid it: Double-check your pay runs and implement internal controls. If mistakes happen, address them promptly and communicate openly with your team.
3. Improper Time Tracking
Hourly employees are entitled to overtime pay under the Fair Labor Standards Act. But improperly logged breaks, travel time, or after-hours work can lead to compliance violations — or disgruntled employees.
✅ Avoid it: Use reliable time-tracking tools and clearly communicate timekeeping expectations to staff.
4. Failing to Report All Income
Payroll taxes apply to more than just base wages. Bonuses, commissions, fringe benefits, and even gift cards may be considered taxable compensation.
✅ Avoid it: Keep detailed records of all employee compensation — including the not-so-obvious items — and include them in payroll tax reporting.
5. Missing Tax Deadlines
Depositing payroll taxes late — or worse, borrowing from withheld amounts — can result in steep penalties. And the IRS can hold business owners personally liable for unpaid payroll taxes.
✅ Avoid it: Know your deposit schedule and reporting deadlines. Most small businesses must deposit payroll taxes monthly and file quarterly reports (Form 941).
6. Issuing Inaccurate W-2s
Form W-2 errors can lead to filing penalties and unhappy employees during tax season.
✅ Avoid it: Use integrated payroll software or third-party providers to ensure accuracy and alignment with IRS rules.
7. Relying on Manual Processes
As your business grows, spreadsheets and manual systems become risky. One missed formula or absent team member can throw payroll off track.
✅ Avoid it: Consider upgrading to a payroll solution that integrates with your accounting and HR systems. Automation increases efficiency, accuracy, and peace of mind.
Get Payroll Right — The First Time
Whether you’re managing payroll in-house or considering outsourcing, Bland & Associates can help. We work with small business owners to reduce risk, increase efficiency, and stay ahead of ever-changing regulations.
Let’s make payroll the least of your worries.