06/27/15 By Jennifer Brown


Did you know that each year, businesses spend as much as 40% of their time on non-revenue generating tasks with much of this dedicated to payroll? Not to mention, payroll is the most common area in which businesses get into trouble – often facing fines, penalties, lawsuits, and back pay issues – for non-compliance. I recently had a chance to talk with Lisa Collins, who is an Area Sales Manager with PrimePay, about some of the landmines associated with payroll.

Lisa mentioned that there are 3 common mistakes that employers make when it comes to payroll:

Misclassification of employees.

1. Classifying what truly is an employee (e.g., you are their sole employer, direct their work, specify their work hours, and he/she has not set-up their own LLC or sole proprietorship) as an independent contractor. For more information, click here.

2. Classifying non-exempt employees (who are eligible for overtime pay and/or minimum wage) as exempt employees. For more information, click here.

Note: The IRS and Department of Labor have very strict rules about classifications and have increased their efforts in recent years to find and take action against employers who violate these rules.

Not collecting the right state taxes.

With the increase of businesses that operate in multiple states and have employees who telecommute from states other than the one in which their business is headquartered, collecting the correct state taxes can be daunting. State taxes are based on where someone LIVES not where they work. While some states offer reciprocity, others do not. Be sure to check the state tax laws for the state in which your business is located and the state in which your employees live.

Non-existent or Ineffective Paid Time Off Accrual Policy.

Without an effective policy on this, your business could be liable for paying out all accrued, unused paid time off. As you can imagine, this can add up to thousands of dollars owed to an employee when they leave your company. It is important to have a written policy for time off accruals that includes 1) a cap that specifies the amount of paid leave that can be rolled over from year to year and 2) the amount of leave that will be paid out upon termination.

Note: Different states have different laws about the payment of accrued, unused sick and vacation leave, so be sure to check your state’s laws.

Avoiding these 3 costly payroll-related mistakes, will save you not only money, but time and a lot of headaches!


Image courtesy of iosphere at FreeDigitalPhotos.net