Payroll is a highly-detailed, complex and time-consuming process, and a lot of behind-the-scenes work goes into making it seamless, from start to finish. It’s also one of the top priorities for any business because it helps maintain employee morale and your company’s financial stability.
If you’re a small or medium-sized business that handles your payroll processing in-house to save money, you may want to rethink that tactic. Even small mistakes can have costly consequences, including pricey penalties, employee dissatisfaction, and negative impacts on your budget.
Here are four common payroll mistakes that can hurt your business (and how to avoid them).
How to Avoid Costly Payroll Mistakes
Payroll can be a taxing process (no pun intended) and requires in-depth knowledge to function in a smooth and error-free manner. Make sure you’re not making common payroll mistakes that can lead to costly damages.
1) Late Tax Payments
As an employer, you’re responsible for withholding and remitting a portion of your employees’ wages for taxes and contributions. The payroll tax deductions specified by the Canada Revenue Agency (CRA) include:
i) Federal Income Tax
ii) Provincial Income Tax
iii) Canada Pension Program (CPP)
iv) Employment Insurance (EI) Premiums, and
v) Registered Retirement Savings Plan (RRSP) contributions.
Failing to pay the taxes deducted from your employees’ wages, or making late payments, can result in hefty penalties which increase based on how late you file.
To avoid this mistake, put these due dates on your calendar app and set a reminder. If you make monthly deposits, deposit employment taxes by the 15th of the following month.
2) Misclassifying Employees
In today’s gig economy, it is common for small businesses to hire independent contractors or part-time employees. When making payments, it’s important to classify them as contractors, not full-time employees, as the company must withhold income tax for employees but not contractors. This is because independent contractors run their own business and can deduct business expenses from their earnings. If you classify an employee as an independent contractor, you may face various penalties.
To avoid this error, you need to understand where the lines are drawn and how the labels are determined. A full-time employee is paid wages with payroll deductions such as CPP, IE and income tax taken by the employer whereas an independent invoices the business for their work. An employee is paid the same salary or wage regardless of the business’s profitability whereas independent contractors running their own business assume the risk for its profitability or losses.
3) Miscalculating Pay
With so many deductions, commissions and overtime, calculating payroll correctly can be stressful for administrators, especially if they’re not certified bookkeepers. Not paying the correct amounts or forgetting to process payroll is big mistakes that can negatively impact your business, both in terms of finances and employee happiness. These include your employees’ motivation and productivity; they can also indirectly affect your profits.
Failing to keep track of your employees’ hours and time off can lead to miscalculated pay. One reliable way to correct this is to outsource your payroll processing.
4) Incomplete Payroll Records
Complete and accurate payroll records are imperative to ensure seamless payroll functioning. You should have at last three years’ worth of pay records including hours worked, payment rates and payroll dates. Failing to keep accurate payroll records can result in a variety of fines, penalties and other tax- or payroll-related issues if you find yourself audited.
This mistake is common when you rely on paper timesheets instead of digital media. After all, paper documents are perishable and can be misplaced, swapped or altered manually with no record of changes made. Switch to payroll software for accurate, complete, and up-to-date payroll records that can be accessed anytime from anywhere.
Being aware of the most common payroll mistakes and the reasons behind them is a great first step towards avoiding them. Once you identify the mistakes and take corrective measures, your business will benefit from a smoother payroll process that satisfies your employees. If you think your business’ payroll would be better taken care of by a professional bookkeeper, contact us for exceptional (and affordable) payroll processing services.