Navigating the maze of payroll compliance is one of the biggest challenges for small business owners. Steer clear of these five common pitfalls to protect your business from costly penalties.
Table of Contents
- Misclassifying Non-Exempt Employees as Exempt
- Mishandling Overtime Pay
- Inadequate Record Keeping
- Missing State-Specific Requirements
- Late Tax Deposits and Filings
1. Misclassifying Non-Exempt Employees as Exempt
Labeling an hourly employee as “salaried, exempt” to avoid paying overtime is a severe violation of the Fair Labor Standards Act (FLSA). The duties test is strict, and misapplication can result in back pay for two years of overtime, plus penalties.
2. Mishandling Overtime Pay
Overtime isn’t just 1.5 times the hourly rate. It must be 1.5 times the regular rate of pay, which can include non-discretionary bonuses. Failing to calculate this correctly is a common and expensive error.
3. Inadequate Record Keeping
The Department of Labor requires you to keep specific payroll records for at least three years. This includes hours worked, wages paid, and dates of payment. Incomplete records make you vulnerable during an audit.
4. Missing State-Specific Requirements
Beyond federal law, states have their own rules for minimum wage, paid sick leave, meal and rest breaks, and final paycheck timing. Assuming federal law is sufficient is a major risk.
5. Late Tax Deposits and Filings
The IRS and state agencies impose strict deadlines for depositing payroll taxes and filing quarterly returns. Penalties for late deposits are steep and escalate the longer you are overdue.
Compliance isn’t a “set it and forget it” task. Laws change, and your business must adapt. Ignorance is not a defense in the eyes of the law.
Stay Compliant with Confidence
Stay on the right side of the law. The experts at Payroll On The Money keep you compliant with ever-changing federal and state regulations.