Payroll For Startups: 5 Common Mistakes To Avoid

Farwah Jafri | May 19 2022

Even the best falter and fail, be it super athletes, winning teams, or booming startups. More often than not, faultiness lies in little things. Small stuff that startup owners take for granted accumulates into one big catastrophe and derails them from the winning track. For startups, poor payroll management is a little kryptonite that ensues demise.

Moreover, payroll mistakes aren’t just common in startups with poor structure and management. The best startups make payroll mistakes too.

However, seasoned entrepreneurs know these mistakes are warning signs, indications that shine a light on issues in culture and internal processes.

So, without further ado, let’s pay heed to five common startup payroll mistakes even the best make and discover solutions to take them down before they shut us up.


1. Improper Employee Classification

In an attempt to evade taxes and slash health premiums and compensation costs, some startups intentionally misclassify employees as independent contractors. As private workers are not eligible for life care, pensions, and other benefits, it helps startups reduce some expenses. However, misclassification isn’t as benign as it seems.

Intentional misclassification of employees is an offense subject to state-level fines. In California, the fee varies from $5,000 to $25,000 per incident. Undoubtedly, a hefty cost to pay that is substantially larger than the total of compensations, benefits, and taxes saved.

Moreover, state-level fines for such violations vary from state to state, and these legal codes must be common knowledge of all startup owners, especially those who aim to succeed.

2. Poor Record Keeping

Poor record-keeping isn’t an offense… is it? No, it isn’t. However, it is due diligence for all startups. As per the Fair Labor Standard Act (FLSA), all employers must keep payroll records of at least the last three years.

These include wage scales, a record of hours worked, payroll processing date, and other essential details.

Furthermore, payroll record-keeping comes in handy whenever the startup is up against litigation or penalty and is a requirement better to follow than to avoid.

Moreover, the recording period also varies from state to state, and it is essential to know the state’s requirements where your business operates beforehand. You may even have to keep records of more than three years, so it is best to stay informed.


3. Faulty Payroll Calculation

Calculating startup payroll is trickier than it seems. It isn’t just merely multiplying hours worked with the hourly wage. A payroll manager must also factor in commissions, deductions, overtime, and PTO.

More than that, incorrect payroll calculation inflicts serious harm on employees’ satisfaction levels and taints the company’s stature. Nobody wants their employees to lose faith, and that’s why it is a must to keep payroll calculations up to date and hit the bull’s eye.

Moreover, there’s more at stake than the company’s reputation and employees’ faith. The inability to pay accurate salaries is criminal liability.

Safe to say, that’s the main reason why many startups opt to outsource payroll management, not because it is a complicated chore but more so because there’s a lot at stake.


4. Bad Payment Scheduling

Managing payroll is no side affair; it is a full-time task that requires managing complexities and tax duties at state and federal levels. Moreover, it isn’t only a headache for businesses with fleets of employees but even a bigger problem for employers with a small workforce.

Often, small startup owners struggle to delegate payroll management responsibilities, leading to poor payment scheduling. As it goes, many startup owners falsely believe that a payroll system is all you need to fix payroll processing.

The truth is that these systems aren’t as heroic as they seem and don’t offer complete payroll solutions, mainly because they ignore worker’s compensation, health benefits, employment-related provisions, Form I-9, etc.


5. Mixing Business and Personal Finances

Initially, it seems harmless to mix personal and business finances. After all, startup owners usually pay initial business expenses from their pocket, so isn’t it right to claim so?

The answer is NO. That’s because mixing personal and business finances erase the line between the two and puts business owners’ finances in jeopardy. Moreover, if the startup gets audited or sued, the owner’s personal finances get exposed, triggering an undue investigation.

Yet still, this is one startup payroll mistake that the majority make, but you better avoid it. As a rule of thumb, always keep your personal and business accounts separate because it is hard to untie them once they get tangled.


How to Avoid Common Startup Payroll Mistakes?

Startup payroll mistakes are common but in no way unavoidable. In addition, these mistakes are easily resolvable too. All you need to do is to check the warning signs and make payroll management a priority.

Making startup payroll management a priority implies delegating the due time and money to make the system work efficiently. The best way to do so is to outsource payroll processing to someone who excels in taking the hassle out of payroll.

Many third-party contractors and companies like us manage payrolls for startups that lack the time, resources, and expertise to do it themselves.

So, why choose Monily?

Because Monily provides efficient payroll processing solutions at the most nominal rates. We set up a compliant payroll management solution for you that mitigates all potential risks before they inflict any harm.

See Also: 10 Helpful Tips in Managing Payroll Effectively


The Final Verdict

Startup owners must know the ins and outs of payroll processing to ensure their business move forward without a hitch.

The only other solution is to outsource payroll management. Remember, outsourcing payroll management is not an expense but an investment.

It ensures your business run smoothly, employees remain happy, and your reputation stays strong.

So, become an expert or hire one. Just don’t put payroll management on the back burners.

Author Bio

Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.