Payroll isn’t sexy, but it is necessary. (Click to Tweet).
It’s also critical to get it right because if you don’t, the consequences can be huge. Really.
You can receive fines of tens of thousands of dollars. And those fines are NOT tax deductible, as I discovered when I spoke to Tracy Angwin recently.
Tracy is the driving force behind the Australian Payroll Association and the bestselling author of ‘The Payroll Revolution’ and ‘Profit from Payroll’.
Tracy shared some fantastic strategies on how to avoid overpaying staff, how to ensure your staff leave balances are correct, and some small business horror stories.
If you haven’t listened to the podcast yet, I’d highly recommend it. It’s filled with expert advice on common mistakes made by small business owners.
Talking to Tracy got me thinking about other mistakes that small businesses frequently make with their payroll.
Tracy and I couldn’t cover everything in the podcast, so I did a little research. I found there are several mistakes that we didn’t get time to touch on and I wanted to share those with you here.
I’m not an expert in this area, so I’m sharing advice from other specialists in the field.
At the end of the day, this is a very complex area. It’s a good idea to speak to payroll or legal experts to be sure you get the best advice for your business and your specific needs.
1. Defining Employees as Contractors
This is a big one. Many people think that calling someone a contractor is all there is to it and they may hire a dentist as a contractor.
But the definition of a contractor is an interpretation of the law that makes a contractor. Lockwood and Ward, taxation and business advisors say that contractors usually:
- provide their own equipment and tools
- responsible for the commercial risk associated with the work
- paid upon the completion of the assignment
- retain the right to control how they perform services
- provide a specific result rather than filling an ongoing role
So hiring someone as a contractor doesn’t make them a contractor in the eyes of the law.
2. Paying Too Much
It’s critical you understand pay loadings and how to apply them appropriately because many small businesses overpay their employees. Tracy gave an example of this in the podcast.
The scenario was when an employee comes in early on a Friday and receives a shift penalty of 15%. If that person also goes into overtime, this can get confusing. Tracy said,
“… rather than paying time and a half on the Friday rate including the shift penalty you actually need to drop the shift penalty and then apply the time in half.”
Tracy sees a lot of employers paying 150% of the loaded rate, and they’re overpaying people.
3. Failing to Track Legal Changes
Proposa, an online lender to small business says the tax code is complex and constantly evolving. They say,
“Failing to keep track of changes can mean a costly audit …”
The best thing to do is to monitor the ATO’s website or hire a tax adviser to keep your business current in this area.
4. Neglecting New Hire Checklists
The i3Group provide payroll management services, and they say people often fail to onboard their new team members effectively. They say,
“ … there is a lot to consider, and if you don’t have a new hire checklist in place, complete with payroll considerations, you are making a mistake.”
The smart way to onboard new people, save yourself a bunch of time and get them up and running fast is to have a clear process. If you don’t have a checklist already, steal my Onboarding New Staff Checklist and modify it to suit your business.
That way you’ll get your new people onboard effectively and efficiently. Every. Single. Time.
5. Overpaying Superannuation
A lot of businesses unknowingly overpay superannuation. In the podcast, Tracy explained that many people assume that superannuation is nine and a half percent on your gross wages, but that’s not the case at all.
She says superannuation is,
“… 9.5% on what’s called ordinary time earnings so for example shift penalty attracts superannuation, but over time doesn’t.”
Going back to her example of the employee starting early on Friday and earning both overtime and a shift penalty this gets confusing. Businesses can end up overpaying superannuation.
“They overpay the shift the time and a half, and the double time on the shift penalty and by paying another 9.5% superannuation which you are not obliged to pay.”
6. Missing Payroll Deadlines
Some of the most common mistakes are the most simple, but they’re worth reiterating.
PJS accountants say you need to know your deadlines because you don’t want to miss them. They list three critical deadlines:
- PAYG withholding
- Payment summaries
- Superannuation reporting.
Payroll Mistakes Can Be Costly
At the end of the day, payroll mistakes can be costly and complex. It’s critical you know exactly what you’re doing and that you stay up to date, or that you hire an expert.
Ignorance is not bliss when it comes to payroll. Fair Work investigate first and ask questions later, and the fines are up to $51,000 per breach.
Don’t be caught out. You owe it to your team, but more importantly, you owe it to yourself.
Don’t let payroll mistakes cost you a fortune.