How to Avoid Top 5 Payroll Mistakes

Let’s face it—payroll isn’t why you started your business. But unless your dream involved IRS penalties and frustrated employees, it’s a corner of your operations that deserves attention. 

As a CPA who works with small service-based businesses every day, I’ve seen some common payroll pitfalls that sneak up on otherwise savvy owners. The good news? These mistakes are avoidable—and we’ll show you how. 

1. Missing Payroll Tax Deposit Deadlines 

If payroll taxes had a motto, it would be: “Pay us on time—or else.” The IRS doesn’t mess around when it comes to employment taxes. Late deposits come with a steep, tiered penalty structure: 

• 1–5 days late: 2% penalty 

• 6–15 days late: 5% 

• More than 15 days late: 10% 

• Unpaid after 10 days of notice? You’re looking at 15% 

And these numbers add up. In 2023, the IRS collected around $7 billion in tax penalties nationwide, much of which came from missed or incorrect payments—including payroll taxes. They don’t break it down by state but rest assured: Arkansas businesses aren’t exempt. 

How to avoid it: Use automated payroll software with built-in tax reminders—or better yet, outsource to a trusted payroll service (hi, that’s us 👋). Staying ahead of deposit deadlines is not just smart; it’s non-negotiable. 

2. Failing to Keep Proper Payroll Records 

If you’ve ever thought, “I’ll just remember that,” when it comes to tracking employee hours or deductions—you’re not alone. But payroll records are like receipts: you don’t need them until you really need them. 

Inaccurate or missing records can cause: 

• Audit headaches 

• Legal disputes 

• Delays in tax reporting 

  
  

How to avoid it: Keep detailed payroll records for at least four years. That includes timesheets, pay stubs, tax filings, W-2s, and anything tied to employee compensation (we can help with this too😊). Whether digital or paper, what matters is consistency and accessibility. 

3. Miscalculating Overtime Pay 

Overtime rules are tricky, especially when employees wear multiple hats. A salaried worker who’s “non-exempt” still qualifies for overtime, and bonuses may factor into the base pay used to calculate it. Confused yet? So are many employers. 

Common issues include: 

• Paying time-and-a-half only on hourly base pay 

• Forgetting to track after-hours work 

• Mislabeling employees as exempt when they’re not 

  
  

How to avoid it: Review FLSA overtime rules regularly (or talk to your accountant—we live for this stuff). Time tracking tools can help ensure accuracy, and classification reviews are worth scheduling annually. 

4. Inaccurate PTO Tracking 

Paid time off sounds simple—until your employee swears they had five days left, and your spreadsheet says three. Managing PTO manually often leads to confusion, frustration, and inconsistent policy enforcement. 

How to avoid it: Automate PTO accrual and tracking. There are many affordable tools that integrate with payroll. Also: make sure you have a clear, written PTO policy (yes, even if your team is small). Clarity today saves headaches tomorrow. 

5. Poor Onboarding into the Payroll System 

It’s the classic payroll blunder: a new hire’s first check is wrong because someone missed a form, input the wrong tax status, or forgot to hit “submit.” Not the warm welcome you intended. 

Common mistakes: 

• Missing W-4 or I-9 forms 

• Wrong pay rate or start date 

• Incomplete direct deposit setup 

  
  

How to avoid it: Use a standardized checklist when onboarding new hires. Include tax forms, direct deposit info, and a system login. Many payroll systems let you set this up once and reuse it each time—which is exactly how onboarding should feel. 

👊 Final Thoughts 

Payroll mistakes may not be headline news, but they will make themselves known—often in the form of penalties, paperwork, or puzzled employees. With a little attention and the right tools, though, you can keep your payroll running smoothly and your stress level low. 

Need help setting up or reviewing your payroll system? Let’s talk. Our firm specializes in making payroll painless for small business owners like you.