Startup Payroll: 5 Tips to Avoid Common Mistakes

Startup Payroll 💵

As a startup employee, your time is always a hot commodity. While you can shift some priorities, payroll is an unavoidable task — even at startups. It demands their attention every two weeks or however long their company’s pay period lasts. But with limited resources, startup payroll can easily turn into a time-consuming chore. In a survey of small business owners conducted by Intuit, 63% of small-business owners said they spend more time than they realized on calculating payroll taxes. Some employers said the total amount of time they spent on payroll every year added up to 21 days!Plus, startups with little to no HR support may be unsure how to process payroll correctly—potentially leading to errors and hefty legal and financial penalties. There’s a smarter and faster way to run your startup’s payroll without mistakes. Implement these 5 tips to process your startup’s payroll efficiently and compliantly.

Tip #1: Keep detailed, complete records 📒

Recordkeeping isn’t always a top priority at startups — but it should be. If you don’t keep detailed records, your company will be in trouble if it’s ever sued or audited.Stay compliant by checking business recordkeeping rules from your local, state, and federal government agencies. Here are a few guidelines for businesses operating in the US:

The Department of Labor requires businesses to retain all their payroll records for at least three years, including pay stubs, time tracking records or time sheets, and wage rates.

The Equal Employment Opportunity Commission requires employers to keep records for two years that explain the basis for compensating employees of opposite sexes differently.

The IRS requires businesses to keep all their employment tax records for at least four years after the tax is due or paid — whichever happens later.

Keep in mind, paperwork becomes more difficult to organize as startups scale and begin to work with more and more employees and contractors. Develop good record-keeping best practices from the start so you’re ready for future growth. To start, keep all your payroll records, tax filing forms, and tax payment receipts in a secure, cloud-based tool—like a payroll platform, accounting software, or document management system.Along with using payroll software, set up a designated company bank account for running payroll—not a personal bank account belonging to the business owner. The owner’s personal assets will be at risk if they don’t keep personal and business records separate, and the startup faces legal action.Create detailed individual employee payroll records by requesting all necessary tax forms from new hires before they even start onboarding. This timeline lets you collect employees’ payroll information early and calculate their payroll accurately from Day One. The forms you collect may include Form W-4 and Form I-9 for US-based employees, Form W-9 for US-based contractors, and Form W-8 BEN or W-8 BEN-E for international contractors.

Tip #2: Check your payroll deductions and calculations 🧮

Running payroll is much more complicated than just calculating hours worked multiplied by hourly rate. You also have to deduct payroll taxes and employee benefits, while adding on bonuses, commissions, paid time off, and overtime.It’s easy to mess up payroll if you’re not double-checking, or even triple-checking, your deductions and calculations. Payroll accuracy is critical because you owe the IRS a certain amount of taxes per employee — some of which you must withhold from your employee’s paychecks and remit on their behalf. This rule applies to:

Federal income tax

Local and state taxes

Medicare and Social Security taxes, and

Federal and state unemployment taxes

Remember that tax laws and obligations differ across states, even if your workers are fully remote.You’ll also have to fix discrepancies if you short-change employees due to your own accounting errors. You may need to refund the employee, adjust future withholding amounts, and even file a claim with the IRS. You could also face a Failure to Deposit Penalty from the IRS if you don’t pay your employment taxes on time, in the right amount, and in the right way. One small payroll mistake can snowball into a giant tax headache. If you lack the time or resources to do payroll calculations, consider outsourcing the process to Pilot. Many startups and small businesses trust our platform to handle payroll accurately and in compliance with all tax laws and regulations.

Tip #3: Prepare your startup payroll early to submit on time ⏳

With so many moving parts in a startup, it’s easy to forget or not have enough time to run payroll. This is especially true for a People Ops department of one, or a startup founder still responsible for running payroll themselves. One slight oversight and your employees miss out on payday.A late payday is no small matter for employees. According to the American Payroll Association’s 2022 “Getting Paid in America” survey, over 72% of US workers would face financial difficulties if their next paycheck was delayed for a week. When you put employees in difficult financial situations due to your negligence, you're bound to lose their trust and respect. Not to mention, late payments and non-payments are potentially illegal. Your company may face penalties from the Department of Labor, such as liquidated damages that equate to the total unpaid wages plus interest. Avoid late payments and non-payments by preparing your payroll early. For example, you could prepare payroll a week before your payroll run date — usually, about four business days before payday to allow time for direct deposit to go through. Check with your payroll provider to find out if they have payroll change cutoff dates, as the specific deadlines can vary by location. One way to ensure payroll gets done early is to set aside time on your calendar every month specifically to calculate and submit payroll.Or, if manual payroll processing is too much of a time suck, why not automate it instead? With Pilot, the choice is yours: Set up automatic payments once to run every pay period, or manually approve payroll each time.

Tip #4: Classify your workers properly 👩‍💼

Startups often work with independent contractors instead of employees because it’s more cost-effective; you don’t need to pay for employee payroll taxes and health insurance premiums. However, overreliance on contractors is a major problem for many startups, as it exposes businesses to misclassification penalties. According to the IRS, hiring a worker as a contractor while expecting them to perform like an employee constitutes misclassification. The penalties for intentional independent contractor misclassification include back taxes, back pay, and fines from both the IRS and state tax authorities. You could even be held liable for payroll fraud and wage theft!Why is misclassification a big deal? To break it down simply, full-time employees are entitled to specific benefits and treatment from their employers, while contractors are not. In addition, the IRS collects taxes on payments made to employees but not contractors. Determine whether to hire someone as a contractor or employee before they start work. If you’re looking for one-off, short-term work for specific projects, you want to look for contractors. For long-term strategic work, employees are a safer bet to invest the company's time and money into for professional development. Include language in all employment contracts that defines your workers as contractors or employees and clarifies their pay rates and pay schedules.

Tip #5: Find cost-effective employee benefits 🕵️

Pricing for some employee benefits—like healthcare—is based on volume. The more employees you have, the lower the benefit expense is per employee. This system makes benefits a major expense for startups since they tend to have small headcounts. But benefits like health insurance are a necessary component of a fair, equitable employee compensation package — no matter how costly or troublesome they are to offer.High-deductible health plans (HDHPs) are a somewhat reasonable option for startups. Under an HDHP, employees must pay a large deductible before the plan pays out 100% coverage. These plans are much more affordable for employers, especially for cash-strapped startups, but employees are left with high upfront costs.Alternatively, buy into large group health insurance plans by outsourcing your human resources department to a professional employment organization (PEO) or employer or record (EOR) service like Pilot’s. The result? Much cheaper per capita insurance rates for your company and better coverage and health benefits for employees without needing to have a large workforce.For all employees, check local, state, and federal labor laws to figure out what benefits you need to provide, such as health insurance, PTO, and more. Depending on local labor laws in other countries, you may be required to provide international employees with more paid leave than workers in the US. For example, you have to provide four weeks minimum of annual leave to employees from the Czech Republic.

Why Pilot is the best payroll software for startups 🏅

Too busy to handle your startup’s payroll? Looking for the perfect HR partner? Look no further than Pilot. Our unified hiring and payroll platform was built by startup founders for startups just like yours.Our payroll services are affordable, with transparent pricing starting at $29 per contractor per month — no hidden fees, employee minimums, or initial setup fees. Our user-friendly platform also makes it easy to automate payment flows, so you can streamline running your employee payroll and contractor payments simultaneously. All that pesky paperwork and payroll tax calculation nonsense? We take care of payroll management for you.To see Pilot in action, sign up for a free 1:1 demo — or check out the video overview of our platform.