How to Avoid Common and Costly Payroll Mistakes in Your Small Business

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There are few parts of running a business more exciting than hiring your first employees. Although some businesses do this from the start, most business owners have to put in the work to build a stable foundation before they bring in new people. Getting to the point where you’re comfortable building your team — and ready to see where that team will take you — can be a major thrill.


However, hiring also brings new complications, including managing payroll. Figuring out your payroll process can be tedious and tricky, and mistakes along the way can get expensive, fast. Courtesy of the legal experts at Ferguson and Ferguson Attorneys at Law, here’s a look at a few of the most common payroll issues people run into, as well as how to solve them.

Not Knowing the Basics

 It might sound obvious but if you want to avoid common mistakes associated with payroll, first you have to understand what payroll is and how it works. Luckily, ZenBusiness has this handy guide which explains the tax rates, as well as the difference between federal and state taxes, the various deductions, and how you actually submit your payroll taxes in the first place.

Using the Wrong Bank Account

Your business bank account is the foundation of your entire payroll system. Many business owners jump into a business relationship with the same bank they use for personal banking, but that’s not always the best technique. Instead, find a bank account specifically designed for small businesses so that the services offered are the ones you need. What services should you look for? Oftentimes, the best business bank accounts are free to open, don’t require monthly fees or account minimums, have high-yield interest, offer free instant deposits and provide custom cash flow forecasting.

When it comes to payroll, your best bet is a bank account that can automatically sync with your payroll system. This will make the whole process easier and faster and save you a lot of trouble. When it comes to effectively managing your payroll, anything that makes things simpler is a worthwhile investment.

Poor Recordkeeping

Another major payroll mistake business owners make, especially early on, is poor recordkeeping. When tax season comes around, you can wind up in a difficult position if you don’t have clear and complete records of the payments you’ve made throughout the year. Make sure you have an organized and comprehensive filing system you can use to keep track of everything.

Be sure to distinguish between employee and non-employee payments, as well. Remember, you’re responsible for taking taxes out of your employee’s paychecks. Freelance and contract workers handle their own taxes, but you still have to report those payments. If you’re working mainly with independent contractors, be sure to get the relevant tax documents filled out when you start working with them so you don’t have to scramble for it later on.

Missing Important Deadlines

The last major mistake many business owners make when they first start managing payroll also comes down to those employee taxes. You need to pay these out regularly throughout the year, and missing your deadline can lead to serious fines. Timeliness is typically defined by when the taxes are received, so make sure you send your taxes in ahead of time to make sure you don’t get dinged due to mailing delays.

This is one reason time management and keeping an organized schedule are such important skills for business owners. Be sure to make a note of your tax deadlines on your calendar, and consider including several “checkpoint” reminders, as well. This will help you stay on top of things and prevent last-minute panic.

Get Help to Avoid Mishaps

Ultimately, one of the best ways to avoid payroll mistakes altogether is to get some help with the process. For example, you can use a trusted payroll service to take the process over. Although these things can be an investment, if they keep you from making costly mistakes, they’ll be more than worth it. Payroll may not be your area of expertise — and if you outsource that work, it doesn’t have to be.


Ferguson and Ferguson Attorneys at Law is a personal injury, bankruptcy, criminal and domestic relations law firm located in Huntsville and Decatur, Alabama. Our firm was established in 1993, and has been serving North Alabama residents for over 28 years. If you need assistance, contact us today!