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HR and payroll mistakes that all startups need to be aware of

Posted by Neha De

August 25, 2021

The goal of every entrepreneurial venture is to expand gradually and globally. Unfortunately, even the most well-meaning startups slip up when it comes to human resources and payroll functions. 

Check out these eight HR and payroll mistakes that are often made by startups.

Mistake #1: Not hiring a dedicated HR or payroll person

Often, startup owners let their company’s HR and payroll take a back seat to other issues. Having someone on staff or outsourcing your HR to handle these two crucial functions is a good strategy for any business. Not only can this person help you with several compliance issues, they can also help you hire, train and conduct new hires onboarding in such a way that you are set up for success.

Mistake #2: Making poor hiring decisions

Small business owners sometimes feel their options are limited when it comes to hiring employees. They feel, because they are a small operation, they might not be able to offer a potential employee as much as an established company. However, it is extremely essential for a startup to get the right staff. Also, they must never forget that startups are dynamic workplaces and have a lot to offer their employees.

Mistake #3: Classifying employees incorrectly

Many a time, startups wrongly classify their staff members in order to avoid paying taxes and health premiums, or to comply with certain labor laws like paying overtime. However, they can get into a lot of trouble with the IRS if they do not categorize their employees properly, and may end up paying hefty fines. For instance, under Labor Code section 226.8, which “prohibits the willful misclassification of individuals as independent contractors, there are civil penalties of between $5,000 and $25,000 per violation.” 

Mistake #4: Mixing personal and business finances

Mixing personal and company expenses is one of the top payroll mistakes made by startup owners. This usually happens because startups do not make a ton of profit when they are starting out and end up paying employees from their own pocket.

This short-term fix can have a severe long-term impact on their business, as the company will eventually have to clean up its accounts and pay necessary taxes. Also, if the firm is audited or sued (and loses), the court may direct the founder to pay through using personal assets.

Mistake #5: Keeping incomplete records

Companies are required by the Fair Labor Standards Act to keep payroll records for at least three years. These reports must include wage scales, the number of hours worked, payroll processing times and other applicable details required by the law. However, startups sometimes fail to do the needful and are unable to defend their company against future possible litigations and penalties.

Mistake #6: Faulty payment scheduling

Managing payroll can be a complex process, and many startup owners find it challenging to handle payroll taxes at the city, national and federal levels. They end up skipping new employee filings, worker's compensation, health benefits, Form I-9 or other employment-related provisions.

Mistake #7: Overpaying for underpaying healthcare and benefits payments

One key way of hiring and retaining good employees is to offer them a competitive compensation and benefits package. On the other hand, health insurance premiums can be expensive, especially for startups that pay more for less coverage. 

Mistake #8: Ignoring employee development

Employees today want to grow and learn with the organization they work for. This includes ongoing training as well as performance management used to increase productivity and train employees. And not offering employees the opportunity to learn and grow can cause them to leave. Having a solid HR department, or outsourcing HR functions, can help you take care of this.


Neha De
Neha De

Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.

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