Friday Fails: Tips to Avoid Common Small Business Payroll Mistakes with Cory Hershman
Cory Hershman, online payroll training expert, reveals common small business payroll mistakes and shares her thoughts on whether you want to mess with the IRS.
Dusty Weis:
Greetings innovators and welcome to Back of the Napkin, where we explore big journeys in the world of small business with the personalities who make it happen. Welcome back to another one of these bonus segments that we like to call Friday Fails. I'm Dusty Weis, along with Stephanie Davis. Steph, today, we are going to be doing something a little bit different with the Friday Fails, yeah?
Stephanie Davis:
Yeah, you got it. As we've learned already from the fails that we've covered, failure in business can take many turns, and sometimes those fails can happen because of things you just don't know about, like payroll and taxes I'm sure as you're quickly learning as a small business owner, there is a lot that goes into payroll and taxes. How's that going for you?
Dusty Weis:
Not great. Not surprising anybody. I got into this business to make podcasts, I sure didn't get into this business to do taxes or figure out how to do payroll and it's definitely a pain point for me.
Stephanie Davis:
Yeah. Well, the comforting news is you're not alone in how you feel about that. Many small business owners experience the same thing. They went into business to follow a passion and had to pick up payroll and taxes along the way. Because of that, today's fail is dedicated to the top payroll mistakes us small business owners make. We're going to uncover those mistakes by talking to Cory Herschman, who is SurePayroll's sales trainer. Cory has seen a lot of these mistakes firsthand and has had a lot of information to help. With all of that, Cory, thank you for joining us today.
Cory Herschman:
Thank you guys for having me, appreciate it.
Stephanie Davis:
Yeah.
Cory Herschman:
The first fail that I want to talk about that is really common with a small business, and Dusty, to speak to your point, just like you said, you got into being a small business owner because you wanted to make podcasts, not because you wanted to become an expert in calculating payroll, which is why small business owners typically outsource that and hire a service to do that for them. But one of the things that we like to educate small business owners on are employer taxes. You take a look at your paycheck, hopefully you've received a paycheck from an employer at some point in your life, and you take a look at it and you see the gross pay, you see what your employer is taking out for your employee taxes, and then you see your net pay. That's really all you might know.
Cory Herschman:
When you start a small business and you're on the other end of it, you're the employer now. You don't necessarily realize that you're going to offer your employee a gross pay and you cover that whole cost, but then you also have to pay about 10% on top of that in what are called employer taxes. You're matching on social security and Medicare contributions, you're also going to be paying into federal unemployment usually, as well as state unemployment if that's applicable for your business. Depending on the state, we tend to figure about 10% on top of that gross pay. If you're going to pay somebody a thousand dollars in gross pay for the payroll, you can expect about an extra hundred bucks on top of that in employer taxes. That's something that we like to educate small business owners on because for budgeting purposes for payroll, it's super important.
Dusty Weis:
I've got to say, speaking as a small business owner who recently hired his first employee, that comes as a little bit of a rude awakening in the budget process, where you're like, "Oh, I'm going to pay them this much money," no, actually you're going to pay them this much plus another big chunk on top. It's just kind of an adjustment, something that you have to get used to.
Cory Herschman:
Yes, definitely, and not even the employer taxes, but some employers don't realize that you're agreeing to pay the employee the gross pay, which is the whole thing. It's not just their net pay after their taxes come out. You're agreeing to pay them a gross pay. Whatever comes out for taxes, that's the employee's money that they're then turning around and saying, "Okay, thank you for this thousand dollars Mr. Employer. Now, please take 200 of it back and give it to the government on my behalf for my taxes." There's that component as well that small business owners just don't quite realize, and rightfully so, because like we've talked about, you don't get into small business to become a payroll expert, unless that's the small business that you're starting.
Dusty Weis:
Once we get past that pitfall of, well, how much does it really cost to have an employee, what are some of the other mistakes that you see small businesses making when it comes to their payroll and taxes?
Cory Herschman:
That's a great question. Another one would be then misclassifying those employees that you're hiring. You've worked out the costs, you figured that all out, now you're going to hire your employee and there's a couple of different ways you can classify them. There's W2 employee versus 1099 contractor, and there are different tax implications that come with each one. A lot of small business owners will just say, "Well, payroll taxes, it seems really complex. I don't want to deal with it so I'm just going to 1099 them," and that's usually not the right choice because the IRS has all kinds of resources on how to classify your employees correctly. A lot of times people get classified as 1099 contractors when really they are actually W2 employees. That can have a lot of negative impact on a small business owner later down the line. I would say misclassifying employees in that way is a common mistake.
Dusty Weis:
It's just so much easier to have a 1099 employee than just not have to deal with it. I mean, what's the worst that could happen?
Cory Herschman:
Dusty, have you ever messed with the IRS? Is that someone you really want to mess with?
Dusty Weis:
No, okay. That's fair. It suffices to say it's probably bad.
Stephanie Davis:
I do know that one of the things is that when you misclassify, so to Cory's point, there's W2 and 1099, but then you also have exempt and non-exempt employees. If you have a non-exempt employee, they're eligible for overtime. If you're not classifying them as a non-exempt and then they work a bunch of overtime and you don't pay them, you're going to eventually have to pay them back when that's caught. That's definitely a big mistake that people make when it comes to payroll.
Dusty Weis:
Absolutely.
Cory Herschman:
Yeah, and that's not exactly fair to your employees. That's pay that they have a right to. If you didn't classify them correctly as a W2 employee in the first place and you did it as a 1099, they could be missing out on that overtime. But then if you also decide, okay, W2's the right way to go, now I've misclassified them as exempt versus non-exempt. They still could be missing out on that overtime pay that they're entitled to.
Stephanie Davis:
One thing that I know employees like is when they get a bonus, but I think that's another mistake that small business owners make, in that you can't just randomly give out bonuses and there's different rules for that. Is that the case? What a small business owners need to know about that?
Cory Herschman:
Absolutely. The main thing a small business owner would need to know about giving something like a bonus is bonuses don't happen every single payroll. Let's say you pay your employees weekly and once a month you're going to give them a bonus, if they've earned it. That bonus pay has to actually be taxed at the monthly frequency. What a lot of small business owners will do is they'll just tack it on to the bi-weekly or weekly paycheck. What that will do is it will use the tax table for bi-weekly or weekly payroll, depending on what you use, and it's actually going to take out more taxes from that bonus check than you would need to. Because it's truly a monthly bonus, it's not something you're giving to them as often as you're giving them their regular pay.
Cory Herschman:
That's a big thing that small business owners miss, is making sure that ... When you're using a service, typically you can change the tax frequency, that's definitely something you can do with SurePayroll, but when you're paying employees, even if you were doing it yourself, you've got to make sure that you are calculating and using the right payroll frequency for the kind of pay that you're going to be giving that employee.
Dusty Weis:
Oh boy. This sounds like exactly the kind of pitfall that I'm going to fall into come Christmas time here. When the time comes for giving bonuses, reach out to my payroll service representative and just make sure that I'm doing it right from the start rather than make an expensive mistake.
Cory Herschman:
Absolutely, and your employees will thank you as well because they won't be having as much taken out in taxes for that hard-earned bonus.
Dusty Weis:
That will ensure that we have a merrier Christmas then. Cory Herschman, you are SurePayroll's sales trainer. Thank you so much for joining us on this episode of a Friday Fail.
Cory Herschman:
Thank you so much for having me.
Stephanie Davis:
Some payroll mistakes are super expensive to fix, so while the fail may really hurt in those scenarios, at least there's way to fix and it's definitely a sure-fire to make sure that mistakes like that don't happen again.
Dusty Weis:
Seriously, Steph, it's like Cory said, you don't want to mess around with the IRS. When it comes to your bank account, I'd just as soon take the extra time to make sure that I'm doing it right the first time rather than take the financial hit down the line. That is just not fun when your margins are as thin as they are, as a small business owner.
Dusty Weis:
But if you want to hear more of some of the other episodes that we've done, check them out in the podcast feed. Be sure to check in with us again soon, we're going to have more full episodes and more Friday Fails coming out on a regular basis.
Stephanie Davis:
So please make sure that you're subscribed in your favorite podcast appropriate, and if you enjoyed the show, leave us a five-star rating or even a review. We would love to hear from you about any ideas that you have for small business owners who we should be featuring on this show.
Dusty Weis:
Back of the Napkin is brought to you by SurePayroll, where small business is their business. From easy online payroll to 401k support and award-winning customer service, SurePayroll has been serving the payroll and business needs of small businesses for more than 20 years.
Stephanie Davis:
Here on Back of the Napkin, along with co-hosting, I'm the executive producer. Co-producers are Carrie Straetz and Dave Pappa, and our production partners are Podcamp Media.
Dusty Weis:
Where we provide branded podcast production services for businesses. Our editor and producer is Larry Kilgore III. Thanks for tuning into Back of the Napkin. I'm Dusty Weis.
Stephanie Davis:
And I'm Stephanie Davis.
