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common payroll mistakesPayroll is essential to the operation of any business. While some may see it as a biweekly annoyance, it is one of the driving forces of a company. Employees are primarily rewarded for their work via paycheck, and if there are late or incorrect paychecks, it can lead to a dissatisfied workforce—not to mention hefty fines for poor labor law compliance. To avoid these consequences, here are some of the most common payroll mistakes companies make and tips to help you avoid them.


  1. Misclassifying Employees

Many businesses will try and save money by hiring workers as independent contractors instead of employees. Hiring employees is expensive—from Social Security to Worker’s Compensation—there are added expenses when you hire someone as an employee.

However, misclassifying employees as independent contractors will get you into serious legal trouble. That being said, the distinction between the two has always been murky. Luckily, the Department of Labor recently clarified the difference between an employee and independent contractor.  It comes down to the “economic realities” test. This determines how essential the work performed is to the business and the amount of control a worker has over his or her work performed.

So, when it comes to classifying your workers, ask yourself. Do you control their hours and the amount of work they perform?  Is that work essential to the operation of your core business? Then they are most likely an employee.

So, when it comes to classifying your workers, ask yourself. Do you control their hours and the amount of work they perform?  Is that work essential to the operation of your core business? Then they are most likely an employee. An efficient workforce management system can help with this.

ease your payroll burden

2. W-2 Errors

The W-2 form is one of the most common tax forms for employers, and therefore, the form with the most frequent errors. From missing information to missing deadlines, an incorrect W-2 form can lead to serious penalties.

Be ready for deadlines. You must postmark employee W-2s by the end of January. This will give employees enough time to check and report errors before filing. Additionally, when filing your employees’ W-2 forms online, they must be filed by March 31st.

Also, beware of incorrect social security numbers. This is so common, that the Social Security Administration has a free number to call to verify up to 5 employee names and social security numbers per phone call. (1-800-772-6270). There is also an online verification service where you can verify up to 10 employees at a time.

3. Failure to Pay Overtime

Failure to pay overtime is one of the most common wage and hour violations, and employers’ exposures to overtime will only increase with the Department of Labor’s proposed changes to the current overtime rules.

Calculating overtime rates isn’t always that simple—especially when dealing with multiple pay rates and blended overtime. Tracking time manually can also contribute to overtime errors. Implementing an automated time and attendance system can help you proactively manage overtime and accurately calculate overtime rates for you—eliminating common manual errors.

4. Incorrect Tax Reporting of Fringe Benefits

From Starbucks gift cards to TVs to trips to Hawaii, there are many ways to compensate and reward your performing employees. However, the IRS clearly states that all forms of compensation are taxable unless otherwise explicitly stated (i.e. health insurance, commuter benefits and achievement awards are not taxable).

However, there is a long list of common fringe benefits that are taxable and should be included as income on an employee’s W-2 form. It’s important to familiarize yourself with the most current version of the IRS’s Employer’s Tax Guide to Fringe Benefits to avoid any tax penalties for under-reporting.

Stay tuned for more common payroll mistakes, or check out other payroll best practices.

See how EPAY can reduce your payroll burden. Schedule a free demo today.
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Want to learn more about how EPAY can help you manage your payroll? Watch the video!