Payroll may seem like a routine administrative task, but make no mistake; when done incorrectly, it can become a costly liability for your business. 

Between federal, state, and local regulations, managing payroll is a complex process that leaves little room for error. Mistakes can not only lead to upset employees but also hefty fines, tax penalties, and damage to your company's reputation.

At N.E.W. Accounting, we help businesses stay compliant and stress-free by managing payroll with accuracy and reliability.

If you're handling payroll in-house or simply want to ensure your existing processes are error-proof, here are the most common payroll mistakes you should avoid — and how you can fix or prevent them before they turn into financial consequences.

Misclassifying Employees and Contractors

One of the most frequent and costly payroll errors businesses make is misclassifying employees as independent contractors or vice versa. 

Misclassification can result in severe penalties from the IRS and Department of Labor, as it affects tax withholdings, unemployment insurance, and benefits eligibility.

What To Know

• Employees are subject to income tax withholding, Social Security, and Medicare taxes, and must receive a W-2 form.
  
• Independent contractors are responsible for their taxes and are issued a 1099 form.
  
  

How to Prevent It

Familiarize yourself with the IRS guidelines on worker classification and regularly review your team structure. When in doubt, consult a payroll or tax professional to ensure proper designation.

Missing Payroll Tax Deadlines

The IRS takes missed tax payments very seriously. Failing to deposit payroll taxes on time can result in steep fines and interest charges. Even late filings of employment tax forms like the 941 or 940 can trigger penalties (even if you have paid the required taxes).

How to Prevent It

Set up an automated payroll system or work with a payroll service provider to ensure tax deposits are made accurately and on schedule. Keep a payroll tax calendar with all due dates marked.

Not Staying Up to Date with Labor Laws

Labor laws are constantly evolving, especially regarding overtime rules, paid sick leave, and minimum wage. Businesses that fail to stay updated risk violating state or federal employment laws, which can lead to back pay claims, lawsuits, and fines.

How to Prevent It

Stay informed by subscribing to payroll and HR compliance updates. Partnering with an accounting firm that specializes in payroll ensures you're always in compliance with the latest regulations.

Incorrect Overtime Calculations

Many businesses unintentionally miscalculate overtime pay, either by applying the wrong rate or failing to account for all eligible hours. This mistake is not only costly to fix but can also lead to wage claims or Department of Labor audits.

How to Prevent It

Understand your state's specific overtime rules and ensure your payroll software is calculating hours and pay correctly. Double-check calculations for employees who work over 40 hours per week or have variable shifts.

Failing to Distribute Pay Stubs or Wage Statements

Some states legally require that employers provide detailed pay stubs or wage statements. These must include hours worked, gross wages, deductions, and net pay. Failure to do so can lead to penalties or lawsuits from employees.

How to Prevent It

Use payroll software or a provider that automatically generates and distributes pay stubs for every pay period. Make sure the information is transparent, accurate, and compliant with your state's labor laws.

Inconsistent Payroll Schedules

Delays or inconsistencies in payroll processing can erode employee trust and may even violate labor laws, depending on your location. A missed or late paycheck — even by a day — can trigger penalties in states with strict payment rules.

How to Prevent It

Choose a fixed payroll schedule (weekly, biweekly, or monthly) and stick to it. Use reminders and payroll software with built-in processing calendars to help you stay consistent and punctual.

Manual Payroll Processing

While doing payroll manually might seem cost-effective, it increases your chances of making errors, especially as your business grows. Manual processes are vulnerable to miscalculations, missed deadlines, and incorrect withholdings.

How to Prevent It

Invest in reliable payroll software or outsource payroll to a professional accounting firm. Automating your payroll drastically reduces the likelihood of mistakes and gives you peace of mind.

Partner With N.E.W. Accounting

If managing payroll feels overwhelming, you’re not alone.

The risks of getting it wrong are high, and the rules are constantly changing. That’s why so many small to mid-sized businesses choose to partner with professional accounting firms that specialize in payroll.

Our team at N.E.W. Accounting is ready to handle all your payroll needs, as well as answer any of your questions regarding the process. 

We have experience working with small—to medium-sized businesses, and can help to reduce your accounting stress and anxiety any time of year.

Let's work together!