5 Common Payroll Mistakes to Avoid

Payroll mistakes can occur in any type of business, large or small, and the results may be costly and sometimes against the law, such as in the case of IRS violations.

Here are some of the most common payroll mistakes to avoid:

1. Misclassification: Employee vs. Independent Contractor

Perhaps the most common audit issue today is misclassifying workers. There’s incentive to treat workers as independent contractors rather than employees because payroll taxes and employee benefit costs are high.

You don’t have the freedom to select the label for the worker; classification depends on whether you have sufficient control over the worker. This essentially means having the right to say when, where, and how the work gets done.

Find information about worker classification from the IRS. When in doubt, consult your tax advisor.

2. “All our employees are exempt, we pay them a salary”.

Paying someone a weekly salary does not make that employee exempt.

Remember-job titles alone do not determine the exempt or non-exempt status of any employee. Exemptions are determined for each specific employment situation based on the specific job duties performed and compensation received.

3. Allowing employees to work off the clock.

The U.S. Department of Labor and the courts do not recognize the concept of voluntary overtime without proper overtime pay. Agreements by employees to give up their rights to minimum wage and overtime pay are void and unenforceable.

Employees generally may not volunteer to perform work without the employer having to count the time as hours worked. Examples include:

Rework:  When an employee must correct mistakes in his or her work, the time must be treated as hours worked, even when the employee voluntarily does the rework.

Waiting for Work:  Time, which an employee is required to be at work or allowed to work for his or her employer, is hours worked. Is the employee “engaged to wait” or “waiting to be engaged?”

Place of Work:  Hours worked include all the time during which an employee is required or allowed to perform work for an employer, regardless of where the work is done, whether on the employer’s site, at home or at some other location.

Working during Lunch:  Lunch breaks aren’t breaks if your employees work during the break.

4. Deducting money from pay without written authorization.

Other than court-ordered garnishments and deductions that are either required or specifically authorized under laws or regulations, all wage deductions should be authorized by the employee

5. Loaning money, advancing wages, or paying wages without maintaining clear, written documentation of the transaction.

Banks do not loan or advance money without a signed, written agreement for repayment and neither should an employer. If loans or wage advances are to be repaid via wage deductions, obtain written authorization for the deductions, specifying amounts and intervals, and do not forget to provide for deduction of any remaining balance at the time of a work separation. Never pay wages in cash without getting a signed, written receipt from the employee.