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Startups should be mindful of these common HR and payroll mistakes

Posted by Shivali Anand

March 11, 2022    |     3-minute read (600 words)

Every entrepreneur's ambition is to grow their business and enjoy its success. But even the most well-intentioned business owners make mistakes when it comes to human resources and payroll. Here are eight common HR and payroll management mistakes that new businesses should be aware of.

Mistake #1: Failing to hire a specialist HR or payroll professional – HR and payroll are frequently neglected by startup entrepreneurs, who are preoccupied with other challenges. A good strategy for any business is hiring someone or outsourcing your HR to handle these two critical functions. Not only can this individual assist you with many compliance difficulties, but they can also assist you in hiring, training and onboarding new staff in a way that ensures your success.

Mistake #2: Choosing the wrong people to work for you – Small business owners may feel their options are restricted when recruiting personnel. They believe that as a small business, they may not be able to give a potential employee as much as a larger corporation. It is, nevertheless, critical for a startup to hire the proper people. They must also remember that startups are fast-paced environments with a lot to offer their employees.

Mistake #3: Incorrectly classifying employees – Startups frequently misclassify their employees to avoid paying taxes and health insurance premiums or to comply with labor requirements such as paying overtime. However, if they do not correctly classify their personnel, businesses risk getting into a lot of difficulty with the IRS and paying significant fines. For example, there are civil fines of $5,000 to $25,000 per violation under Labor Code section 226.8, which "prohibits the purposeful misrepresentation of persons as independent contractors."

Mistake #4: Combining personal and professional finances – One of the most common payroll mistakes made by entrepreneurs is mixing personal and business costs. This is common, as startups do not produce a lot of money when they first start, so they have to pay staff out of their own pockets.

This quick fix might have a long-term negative influence on their firm since they will ultimately have to clean up their books and pay the proper taxes. In addition, if the company is audited or sued (and loses), the court may order the founder to compensate with personal assets.

Mistake #5: Keeping inadequate records – The Fair Labor Standards Act requires employers to preserve payroll records for at least three years. Pay scales, the number of hours worked, payroll processing timeframes and other relevant facts needed by law must all be included in these reports. However, some entrepreneurs fail to take the necessary steps and cannot defend their businesses against future lawsuits and penalties.

Mistake #6: Incorrect payment schedule – Payroll management is a complicated process, and many startup owners find it challenging to handle payroll taxes at the local, state and federal levels. New employee filings, workers’ compensation, health benefits, Form I-9 and other employment-related stipulations are often overlooked.

Mistake #7: Paying too much for too little health care and benefits – One of the most effective ways to recruit and keep exceptional employees is to offer a competitive salary and benefits package. On the other hand, health insurance costs may be expensive, particularly for startups that pay more for less coverage.

Mistake #8: Not focusing on employee development – Employees now want to develop and learn alongside their employers. This comprises both ongoing training and performance management, which are used to boost production and teach staff. Employees may depart if they are not given a chance to develop and progress. You may take care of this by having a strong HR department or outsourcing HR activities.

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