Four HR and Payroll Mistakes Commonly Made by Startups

For many startup companies, doing things unconventionally often leads to great successes. However, not following the rules of compliance can be costly, racking up serious expenses for startups. We’ve compiled four of the biggest HR and Payroll mistakes frequently made by startups to help other new businesses from making the same mistakes.

1. Paying Too Much for Benefit Plans

Since hiring the best employees has now become an intense competition between companies, more and more startups are relying on benefits such as healthcare and retirement plans to draw in the top talents. Even the simplest health care plans can be expensive for startups, especially smaller companies that pay a higher price for less employee coverage. This is typically how health insurance works: larger companies with more employees get better coverage for less and vice versa. This is where a PEO can come in handy. PEOs utilize co-employment arrangements to provide health care and benefit plans for all businesses under its umbrella, giving smaller companies access to better healthcare packages for a lower price than they would otherwise pay. PEOs can also help startups save money on dental and vision plans, as well as 401(k) packages, which are usually only available to larger businesses.

2. Mixing Business and Personal Finances

In the world of startups, creating a separate bank account for a business not generating much income may seem pointless, especially when the founder of the company is paying his employees out of his own pocket. This temporary way of thinking will only lead to unwanted consequences later, as taxes will have to be paid back and finances must be untangled. If the startup is ever audited or sued, not distinguishing between personal and business expenses can lead to the seizure of the founder’s assets, and can even result in the firm losing its corporate identity.

3. Mislabeling Employees as Independent Contractors

Many employers choose to label their employees as independent contractors because they are not required to pay taxes, overtime, or provide insurance to independent contractors. Additionally, employers are not required to give contractors benefits. This is one of the most expensive mistakes a startup can make. If someone is initially designated an independent contractor but then later becomes a company employee with no official change in job responsibilities, the IRS can fine the business for mislabeling that employee all along. In California, fines range from $5,000 to $15,000 per violation.

4. Attempting to Manage Both Payroll and Compliance

A common mistake made by startups is trying to manage both payroll and compliance. Payroll can be tricky, and businesses make mistakes so often that the IRS fines an average of one in three businesses with payroll blunders. Adding in factors like managing compliance laws in different states only adds to the complexity of payroll operations, even if the company has only a few employees. Although many businesses choose to use a payroll service, compliance issues still present a challenge, since payroll services can only do so much. This is why many startups want to let a PEO handle both payroll and compliance, ensuring all reporting is done right the first time.

Interested in PEO services for your startup? Get in touch with us at StaffScapes to learn more about how we can help your new business flourish.