Common Payroll Mistakes Facing Employers

Practice Areas

By: Maunika Patel

Payroll management is one of the biggest expenses for a company, and it can be challenging. However, payroll is also one of a business’s most important responsibilities. Even small payroll mistakes can be costly and take time to fix. Solutions may include amending payroll reports, and even paying interest or penalties to government authorities. Companies should work with an experienced accountant to ensure they avoid the most common payroll pitfalls.

Employers face common and costly issues when it comes to processing payroll, which may include:

1. Misclassifying Employees 

Employers may face costly fines for misclassifying employees. Employee classification is very important as each type of worker – whether full time, part time, or independent contractor – has different tax requirements and is reported differently for tax purposes. The standards for classifying an employee versus an independent contractor may vary by state.

For every employee, employers must withhold income taxes, and taxes on income paid to them, including Social Security, Medicare, and unemployment tax. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. Further, if a full-time employee is classified as a contractor, that employee may be denied some company benefits such as overtime, vacation pay, and pension.

Meet with an experienced Chugh, LLP legal professional to learn about worker classification and avoid the costly mistake of misclassifying your workers.

2. Paying Overtime 

Both federal and state laws require employers to pay their employees overtime for hours worked above 40 hours in a workweek. Specific law depends on the state. The general rule for overtime pay is 1.5 times the rate of an employee’s regular wages.

The 40-hour workweek rule generally applies per week and is not averaged out per pay period. For example, if a company pays bi-weekly, an employee who works 45 hours in the first week and 30 hours in the second week would be entitled to five hours of overtime pay for that pay period, even though they only worked a total of 75 hours.

3. withholding and paying taxes 

All employers are required to withhold Federal, Social Security, and Medicare taxes from employee wages. If a company withholds Federal taxes for example, and then fails to pay them to the IRS, it can cost the company in late fees, penalties, and even legal challenges.

4. Completing court-ordered garnishment

A payroll garnishment occurs when a court issues an order requiring an employer to deduct a certain amount from an employee’s paycheck and send it directly to an agency until their debt is fully paid. Failure to do so can make the company subject to penalties.

5. submitting payroll tax deposits and payments

The IRS charges fines and penalties for late payroll tax payments. To avoid costly fines and penalties, always make sure that your tax deposits are made timely on the 15th day of the following month or as per the due date.


If you would like professional guidance on pay and labor issues, Chugh CPAs, LLP can provide your business peace of mind. Contact the accounting professional with whom you work at Chugh CPAs, LLP for further assistance.