6 Common Payroll Accounting Mistakes to Avoid

Payroll accounting comes with the territory of running a business. If your business has employees, you’ll need to pay them — and you’ll need to record these employee payments for both internal accounting purports and tax purposes. Mistakes can happen, however. According to the U.S. Internal Revenue Service (IRS), one-third of all employers make payroll accounting errors. Below are some of the most common payroll accounting mistakes.

#1) Classifying Employees as Contractors

One of the most common payroll accounting mistakes is classifying employees as contractors. Also known as independent contractors, contractors are workers who provide on-demand labor for a business. They don’t follow a fixed schedule, nor are they entitled to employee benefits. Misclassifying employees as contractors is an all-too-common payroll accounting mistake.

#2) Overlooking Exempt and Nonexempt Statuses

When performing payroll accounting, you’ll need to consider whether employees have an exempt or nonexempt status. There are nuances between these two statuses. Nonexempt employees, for instance, are eligible for overtime, whereas exempt employees are not. But only employees who are aren’t paid a predetermined amount of money throughout the year are typically eligible for the nonexempt status.

#3) Unpained Training

A payroll accounting mistake that’s common among small and medium-sized businesses is unpaid training. Millions of businesses require new employees to undergo a training period. Whether the training period lasts one day or two weeks, new employees must be compensated for it.

#4) Using the Wrong Tax Rate

Many businesses make the mistake of using the wrong tax rate. Tax rates vary from year to year. Just because you used the correct tax rate for your business’s employees last year, you may need to use a different tax rate this year. As a business owner, it’s your responsibility to stay on top tax changes, including tax rates for federal income, state income, unemployment and more.

#5) Not Keeping Records

Another common payroll accounting mistake to avoid is not keeping records. Some businesses — particularly small businesses — assume that records aren’t necessary. If they only have a few employees on their payroll, they may pay their employees without keeping records. But the IRS requires all businesses, regardless of size, to maintain payroll records.

#6) Performing Payroll Accounting Manually

You shouldn’t attempt to perform payroll accounting manually. Even if your business is small with only a few employees, you should take advantage of software. Accounting software like QuickBooks supports payroll accounting. You can use it to easily handle all of your business’s payroll accounting needs.

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