If you have employees and often sweat the finer details of getting their deposits or checks to them, you may have had this thought come to you more than a few times: Someone should pay me for doing payroll.
You're forgiven for being stressed. Payroll taxes are financially and administratively the most burdensome task that a business owner has to deal with, according to the 2015 Small Business Taxation Survey from the National Small Business Association, which queried over 675 small-business owners. Payroll's unpleasant nature is one reason why so many companies have human resource departments. But even then payroll mistakes can still be made.
Bryan Clayton of Nashville, Tennessee knows from experience. Before he started GreenPal, a website where consumers can find lawn care services, he owned a regional landscape construction firm with over 125 employees.
"We had a dedicated in-house payroll administrator who handled all of our payroll duties appropriately," Clayton says. "Or so I thought."
But according to Clayton, a random audit by the Department of Labor in 2012 concluded that his business was paying middle managers as salaried employees instead of hourly. The auditors then informed Clayton that his company owned 27 middle managers back pay in overtime totaling over $475,000.
"This was one of the worst moments in my journey of owning and operating businesses for 20 years," Clayton says. "It almost sunk our company."
So if you're often pulling your hair out over your payroll, consider keeping these potential blunders in mind.
1. Misclassifying Employees
That was the mistake Clayton's company made. He says the main sticking point the Department of Labor had was that although the middle managers oversaw the work of five to 10 employees, sometimes they were engaged in physical labor as well. That, Clayton says, made them hourly and not salaried employees.
"Misclassifying employees is a huge, common problem," says Chase Garbarino, CEO of VentureApp, a marketplace to help startups connect with products and services.
Garbarino adds that you can also get in trouble if you misclassify part-time employees and certainly contractors.
—Bryan Clayton, founder, GreenPal
"You must issue a 1099 form if you work with a vendor or contractor who provides a certain amount of hours of services to your business," Garbarino says.
Don't forget your employee is a human being. When you're crunching numbers, in an effort to make your math work out, you might be tempted to "forget" to pay someone overtime. Even if your intentions are good—you plan on paying the overtime when things are a little better—it may not be wise to go there. You could be running afoul of the Fair Labor Standards Act.
One rule of thumb is to think, "How would I feel if my boss did this to me?" That might help you, for instance, avoid deducting pay for disciplinary reasons. This might seem reasonable if an employee broke something expensive, but deducting pay as a punishment is a no-no, according to Samantha Reynolds, a spokesperson for A Plus Benefits, a payroll, benefits and human resources company in Boise, Idaho.
She says that wage payment laws vary from state to state, but on the federal level, employees aren't allowed to deduct anything from employee wages without a signed authorization from the employee to do.
2. Overtime Errors
There are a lot of rules that can be a challenge to stay on top of, says Robert Basso, president of Advantage Payroll Services in Freeport, New York.
For example, "New York State requires that you pay an additional hour at minimum wage for any workers in the hospitality industry who work more than 10 hours in a day," he says.
And calculating overtime when tips are involved can be a headache, he adds.
So if you're struggling with payroll, Basso suggests using a timekeeping system to track hourly employees and overtime, like a user-friendly software as opposed to manual time sheets.
3. Payroll Changes
Forgetting to stay on top of payroll changes can also hurt business owners.
"Tax laws change constantly at the federal, state and local level," says Samuel Kerch, director of finance at Symmetry Software, which specializes in payroll software applications for large employers and payroll providers.
For instance, on May 18 of this year, the U.S. Department of Labor released revised overtime pay regulations that will take effect on December 1, 2016 and is expected to affect 4.2 million white-collar workers nationwide. The new rules increase the salary threshold for the overtime exemption from $455 a week to $913 a week. So if you have salaried employees who make $47,476 or less and they work more than 40 hours a week, you may need to pay them overtime.
Assuming that your payroll software will account for these changes may not be a smart move. You have to make sure it's being updated, Kerch warns.
"Working in the software industry, I am amazed at how many people are simply apathetic to new software updates. The payroll system itself, like any software product, has bugs and problems in the underlying code. As software providers become aware of these problems, they push out updates. Those updates could address everything from incorrect logic in a given payroll situation, to security fixes, to connectivity fixes in the case of electronic payments and filing, to new features because of an overhaul in state or federal withholding rules," Kerch says.
Moving Beyond Payroll Errors
This doesn't mean that you have to outsource your payroll to a third party or even use software, but it may be worth considering. Looking back on it, Clayton wishes he had consulted a labor law attorney to make sure his company was handling everything correctly.
"A few thousand dollars in consulting fees would have saved me a half million dollars and two years of agony," he says.
Not that the half million dollar expense was a complete disaster. Clayton says that his middle managers were really happy to get windfall checks of $10,000 to $15,000, although some of them, feeling bad for the company, tried to return the money.
"Legally, we had to pay all of them every single dime and show proof of it, but the cool thing was that many of our team [members] were able to use the funds to put a down payment on a home or buy new car," Clayton says. "We actually celebrated those stories and victories and turned the whole ordeal into a positive experience strengthening our culture."
And it worked out. When Clayton later sold his company, the buyer recognized that a business that could withstand a half-million dollar loss was a healthy enterprise. Still, if you can't afford to give back thousands of dollars to your employees, you may not want to make too many mistakes on payroll.
Read articles on cash flow.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.