Common Payroll Mistakes Small Businesses Make
Hiring is a significant challenge for businesses that are just starting and looking to grow. In addition, it can be difficult to bring someone on board if you have been working as a small team.
What are the best ways to pay them? How about taxes?
Although adding another member to your team (or more) will increase the amount you have to do behind the scenes, there is no reason to feel intimidated. Once you have the basics down, you can manage payroll like a pro. We've put together a list of common mistakes that companies make when they start to pay their payroll.
Learn the Difference between Employees and Contractors
Many companies who require help in the office will find it easier to hire contractors for specific projects. Although they might be able to stay in the office, it is vital to understand the differences between contract employees and full-time employees.
Taxes are the most significant difference between employees and contractors. You will need to withhold tax money from salaried employees and send it to the government for income tax, social security, etc. A W-2 form detailing how much was paid and what was withheld will be available to your employee at tax time.
Contractors are responsible for the payment of taxes throughout the year. You will give them a 1099 form at the end of the year. This will detail how much you paid them; they can use it to file their personal or business returns. You are not responsible for the withholding process, unlike employees.
Payroll Taxes: Pay Attention
Paying taxes will vary depending on where you live. In addition, your company may need to comply with federal, state, and local tax regulations.
These are the most common categories.
Medicare tax
Social security tax
State unemployment insurance tax
Federal income tax
Federal unemployment tax
Income tax in the state
Local income tax
It can be very costly to miss payments. Spend some time learning about your tax requirements and researching them. You can start by looking at the IRS Website.
Create a Payroll Schedule
Are you planning to pay your employees monthly, weekly, or bi-weekly? Payroll is the most significant expense for most businesses each month. Therefore, payroll can significantly impact cash flow if you decide to pay employees.
Are all your outstanding accounts receivable prone to rolling towards the end of each month? A once-monthly payment might be the best option. However, there are industry standards and expectations that employees should be aware of. Some employees might be unable to wait until the end to get paid. Before making a decision, analyze your cash flow.
You can get Overtime right away
You've probably experienced the joy of getting time-and-a-half payments if you have worked in retail during a holiday. However, as the employer, it is your responsibility to ensure you follow the overtime pay rules. You could be subject to penalties, back pay, interest, and other consequences if you don't pay your employees at the correct rate.
The government states that workers earn 1.5 times their regular wages for each hour worked after 40 hours. However, this does not apply to salaried full-time employees. Instead of being paid an hourly wage, they receive a salary that is based on their skill level and the amount of work they expect to do.
Many large companies rely on enterprise software and payroll staff to manage employee payments and comply with tax obligations. Don't worry if you don't have these resources, as Basis 365 can handle this and more. Reach out to one of our payroll specialists to learn how you can outsource your payroll to our team of experts.
