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Payroll Processing Mistakes Your Startup Needs to Avoid

Posted by Neha De

November 26, 2018

Mistakes happen every day in the business world, and some are more forgivable than others. Payroll isn’t on the list of forgivable mistakes.

Why? Payroll mistakes can be incredibly costly to your startup. Failing to comply to payroll laws gets the government involved which leads to penalties and fines. In the most extreme cases, it can even lead to jail time.

What’s more, when you mess up payroll, your startup's team can lose faith in you, and you may even lose staff members.

To help you avoid costly problems, take a look at these payroll processing mistakes your startup needs to avoid.

Misclassifying Employees as Independent Contractors

So, is your employee part-time, full-time or an independent contractor? This is something you’d need to determine before you hire or on-board a team member. 

Many startups struggle with this question, and it causes big problems with the government. When you misclassify an employee as an independent contractor, you avoid paying your share of payroll taxes, and the government comes calling.

In addition, if you misclassify an employee as a contractor, they miss out on many benefits and protections.

You can tell the difference by what type of work is being done and how it will be completed. If you control it, the worker is likely an employee. If not, the person is an independent contractor.

Misclassifying Employees as Exempt or Non-Exempt

This is another area that causes some confusion.

Nonexempt workers are hourly employees, and they are entitled to overtime.

Exempt workers are salaried employees, and they are not entitled to overtime. They typically perform specific job duties and receive an annual salary large enough to qualify as exempt.

So, if you misclassify your employees, you may end up in a wage and hour lawsuit.

These rules are quite detailed, so do get help from an attorney when classifying your new startup employees.

Paying Payroll Late

If you neglect to pay your staff on time, you risk breaking compliance laws with regards to state pay frequency requirements, and you anger your staff.

To avoid any problems, set a schedule that works for both you and your employees. Then, stick to it.

You have some common options – pay your staff every two weeks or twice per month. You might even consider paying your employees monthly or weekly, although your team might not like the monthly option.

Do pay attention to bank holidays and pay your team appropriately. A good rule of thumb is to stick with the business day before a holiday.

When in doubt, consider outsourcing payroll.

Paying the Wrong Tax Rate

You might know that tax rates change all the time. This causes big problems for startups.

If you pay the wrong tax rate and don’t take care of payroll tax filing, you will have to make up the owed taxes as well as penalties and interest.

Do regularly check tax rates such as the following:

  • Federal income tax
  • Social Security tax
  • Medicare tax
  • Federal unemployment tax
  • State income tax
  • State unemployment insurance tax
  • Local income tax
  • Any additional taxes in your area

You usually have to submit these taxes at the end of a pay period.

In addition, you’ll need to take care of payroll reporting to accounting and ensure W2 reporting is done accurately.

Poor Record-keeping

Finally, you don’t want to make the mistake of keeping poor records. If you are audited, you’ll find yourself with even bigger problems.

Payroll record-keeping is required by the federal and state government. You must take care to not only keep records on what you paid your employees, but what you withheld including taxes and benefits.

Generally, you should keep your payroll records for at least three years.

Again, consider outsourcing payroll so that you can reduce the chance of errors.

Final Thoughts

One of the scariest parts about payroll violations is that you might not even know you’re making a mistake until you get a fine, or the IRS comes knocking on your door.

You can avoid these issues by following our guide here and avoiding the mistakes above.

An outsourcing company is also worth considering. When you outsource your payroll setup and maintenance, you give yourself and your startup an added layer of protection.

Because outsourcing companies stay up-to-date on the latest laws, rules, and regulations, you can be confident that your payroll is staying well above any costly mistakes.


Are you a new startup ready to succeed? Are you looking to get your new brand off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your HR duties, finances, payroll and more to us. Contact Escalon today to get started.


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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