--- title: "Common Payroll Mistakes Small Employers Make | MCC Solutions" description: "The payroll errors that cause penalties and notices: misclassifying workers, late deposits, wrong withholding, and weak records." url: "https://mcc-solutionsnj.com/bookkeeping/guides/common-payroll-mistakes-small-employers-make" --- Bookkeeping guide · Updated October 12, 2026 # Common Payroll Mistakes Small Employers Make Payroll errors are expensive because they involve trust fund money, meaning taxes withheld from employees that the business holds on behalf of the government. Most mistakes are preventable with a few routines. Here are the ones that show up again and again. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** Calling someone a contractor to avoid payroll does not make them one. If the relationship looks like employment, the business may owe back taxes, penalties and interest, and fixed weekly payments with no invoices is a classic red flag. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Owner contribution or loan](/bookkeeping/guides/owner-equity-and-capital-contributions) · [Closing entries and retained earnings](/bookkeeping/guides/closing-entries-and-retained-earnings) · [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) **Free tools:** [True cost of an employee](/bookkeeping/employee-cost-calculator) · [How many sales do I need to break even?](/bookkeeping/break-even-calculator) [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) ## Treating employees as contractors Calling someone a contractor to avoid payroll does not make them one. If the relationship looks like employment, the business may owe back taxes, penalties and interest. A pattern of fixed weekly payments with no invoices is a classic red flag. See the guide on contractor versus employee for the signals. Hiring in another state? [Employer registration in another state](/bookkeeping/out-of-state-employer-registration). If you are unsure, ask a CPA or employment attorney before the next payment, not after a letter arrives. ## Paying payroll taxes late or not at all Cash gets tight and the tax deposit is the money sitting in the account. Using it for rent or inventory is tempting and dangerous, since the penalties are heavy and owners can be personally responsible. Keep withheld taxes in a separate account or at least in a tracked liability, and make deposits on schedule. If you cannot make a deposit, contact the agency or your advisor immediately. Silence is the worst response. ## Wrong withholding setup Entering an employee's forms incorrectly, missing a state setting, or failing to update after a move or a marital change leads to over- or under-withholding. Review each new employee's first paycheck against their forms. Ask employees to update their forms when their situation changes, and keep the new form on file. Remote employees can create withholding obligations in states where they live or work. Ask your payroll provider or CPA before onboarding someone out of state. ## Want us to handle it? We keep payroll records, liability accounts and year-end payroll reconciled with your books. State payroll support is confirmed for your state before we start. **Price:** Free review of your books first, then a written quote before any work starts. [Get a free review and quote](/bookkeeping/#interest) [Payroll and leave tracking in NJ](/bookkeeping/payroll-and-leave-tracking-nj) ## Mishandling owner pay and benefits Owners of some entity types should not be paid like ordinary employees, and others must be. Treat this as a structure question for your CPA. Also watch for fringe benefits such as personal use of a company car or certain insurance, which may need to be added to taxable wages. Paying employees in cash off the books creates a record gap that can affect them in unemployment claims and loan applications, and affects you in an audit. ## Weak records and missed filings Lost time sheets, missing signed forms, unreconciled liability accounts and late quarterly returns all appear in audits and notices. Each quarter, reconcile the payroll liability accounts in the books to the filed returns. Differences mean something was missed or misposted. Keep payroll records for the period your advisor recommends. A short monthly checklist that confirms deposits made, returns filed and reports saved takes a few minutes and prevents most of these issues. ## A monthly five-minute payroll review Once a month, open the payroll summary and ask four questions. Were all deposits made on time? Does the number of employees match who actually worked? Are there any unusual swings in a person's pay? Has anyone's address or status changed? Write the answers in a one-line log. The log becomes proof of diligence if an agency ever asks. Employees also catch errors. Ask them to report anything odd on a pay statement within the same pay period, and fix it in the next run. ## Common questions **What should I do if I discover a past payroll mistake?** Gather the facts and speak with a CPA or payroll specialist. Agencies have procedures for corrections, and prompt, accurate fixing usually helps. **Is a payroll provider responsible for errors?** Providers differ. Read your service agreement, and remember you are still the party responsible to the agencies. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) More guides - [How to Reconcile Payroll Liability Accounts](/bookkeeping/guides/reconciling-payroll-liability-accounts) - [Year-End Payroll Checklist for W-2s and Reconciliation](/bookkeeping/guides/year-end-payroll-checklist-w-2-and-reconciliation) - [Sales Tax Concepts: Nexus, Taxability and Collection](/bookkeeping/guides/sales-tax-concepts-nexus-taxability-and-collection) - [Sales Tax Exemption Certificates: Collecting and Keeping](/bookkeeping/guides/sales-tax-exemption-certificates-record-keeping) Free tool - [Bookkeeping health check](/bookkeeping/health-check) [All guides](/bookkeeping/guides) Reach owners with employees and the people who run their payroll who read this guide: [advertise here](/advertise#employer). Do it yourself ### First Employee Bundle for New Jersey Hiring in New Jersey comes with registrations, postings, payroll filings and a strict test for who counts as a contractor. This lays it out before the first paycheck. [See what's inside ($59)](/toolkits/first-employee-bundle)14-day full refund Course: [Small Business Bookkeeping Basics](/courses/small-business-bookkeeping-basics) ($49) covers chart of accounts, reconciliations, the monthly close, payroll and 1099 basics for owners. It is training with a certificate of completion, not a credential. Excel workbook ### Solopreneur Multi-State Payroll & Tax Calendar Model One workbook for the dates you cannot miss, the payroll math behind them and the cash they will take, for a small employer or a solo owner with a few people. [See what is inside ($39)](/toolkits/payroll-tax-calendar-model) Also in the [Solopreneur Money Toolkit](/toolkits/solopreneur-money-toolkit): 4 products for $99 instead of $146 separately. ## Rather have us keep the books? Ask for a quote. [Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)