7 Payroll Mistakes Small Business Owners Should Avoid

Running payroll might seem like a routine task, but for small business owners, it’s one of the most important financial responsibilities. One wrong move can result in unhappy employees, tax penalties, or even legal trouble. While learning how to process payroll properly is essential, it’s just as important to understand what not to do. This guide walks you through payroll basics and highlights the most common mistakes small business owners should avoid.

What is Payroll?

At its core, payroll is the process of compensating your employees for the work they’ve done. It involves calculating wages, deducting taxes, and delivering net pay either by check or direct deposit. Payroll also includes maintaining records, submitting tax filings, and staying compliant with federal, state, and local regulations.

One essential output of payroll is the paystub—a document provided to employees that breaks down how their paycheck was calculated. Paystubs typically include gross pay, tax withholdings, other deductions, and net pay. They help employees understand their earnings and provide a clear audit trail for your business.

How Do You Calculate Payroll?

Calculating payroll involves several steps, but with the right tools and attention to detail, it can be streamlined:

1. Determine Gross Pay: This is based on hourly wages or salary, plus any overtime, bonuses, or commissions.
2. Calculate Tax Withholdings: Subtract federal and state income taxes, Social Security, and Medicare. To determine the correct federal income tax withholding, you’ll need each employee’s completed Form W-4. This form provides the IRS with information on filing status and any withholding adjustments the employee requests.
3. Account for Other Deductions: These might include retirement plans, health insurance, or voluntary benefits.
4. Pay Your Employees: Once deductions are made, issue the net pay.
5. Generate and Distribute Paystubs: Whether required by your state or not, providing paystubs is a best practice. You can simplify this step using a paystub generator, which automatically creates accurate, professional paystubs based on your payroll data. Paystubs keep employees informed and offer a valuable record for resolving potential disputes.
6. File and Remit Payroll Taxes: Ensure all taxes are submitted to the IRS and state/local agencies on time.

What NOT to Do When Calculating Payroll

Even with the right tools, small mistakes in payroll can lead to big problems. Here are seven things you shouldn’t do when handling payroll for your small business:

1) Don’t Misclassify Workers –

Classifying workers correctly is essential. Employees and independent contractors are treated differently for tax purposes. If you incorrectly label a full-time employee as a contractor to avoid tax withholdings, you could face hefty IRS penalties. When in doubt, review IRS guidelines or consult a professional.

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2) Don’t Skip Tracking Hours Accurately –

Guesswork doesn’t cut it. Whether your team is hourly or salaried, you need precise time records—especially for overtime. Inaccurate or incomplete time tracking can result in overpaying, underpaying, or violating labor laws.

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3) Don’t Forget to Withhold and Remit Taxes –

It’s not enough to calculate taxes—you must also withhold them from paychecks and submit them to the appropriate agencies. Missing these steps leads to IRS fines, interest charges, and possible audits. Payroll software can automate this to reduce risk.

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4) Don’t Ignore State and Local Payroll Laws –

Federal laws aren’t the only ones that matter. Many states and cities have specific payroll rules, such as minimum wage rates, paid leave requirements, or paystub mandates. Failing to comply can lead to penalties or lawsuits.

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5) Don’t Miss Payroll Deadlines –

Late paychecks damage employee trust and morale. Late tax filings can cost your business in fines and interest. Create a schedule and stick to it—or better yet, automate it—to make sure everything gets out on time.

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6) Don’t Use Manual Calculations Without Double-Checking –

Doing payroll by hand invites errors. While spreadsheets might seem cost-effective, even a small formula mistake can snowball. If you’re not using a payroll platform, be sure to cross-check calculations carefully or use online tools to make a paystub accurately and avoid costly mistakes.

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7) Don’t Fail to Keep Payroll Records

Payroll records aren’t just for your reference—they’re legally required. Maintain detailed records of paystubs, timesheets, tax filings, and deductions for at least 3–4 years. Digital recordkeeping makes compliance and audits much easier.

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Keep Payroll Clean—Avoid Costly Mistakes

Payroll doesn’t have to be a pain—but it can become one if you’re not careful. By understanding how payroll works and steering clear of these common errors, you’ll keep your business compliant and your employees satisfied.

If you’re managing payroll in-house, having the right tools makes all the difference. A trusted solution like FormPros can help you calculate wages, stay on top of tax withholdings using employee-provided Form W-4 details, and make a paystub in minutes—so you can focus more on running your business and less on fixing payroll mistakes.

Generate a W-4

FormPros Has You Covered

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