8 Common Payroll Mistakes Small Businesses Can Avoid This Year

For small business owners, running payroll isn’t just about cutting checks. It’s about maintaining compliance, keeping employees happy, and avoiding costly penalties.

Yet, payroll mistakes are surprisingly common, especially as tax regulations and labor laws evolve. In 2025, it’s more important than ever to stay on top of payroll responsibilities and avoid errors that can snowball quickly.

Whether you’re processing payroll in-house or using software to manage the workflow, here are eight common mistakes small businesses should be aware of and how to avoid them.

1. Misclassifying Employees and Contractors

One of the most common payroll pitfalls is incorrectly labeling workers as independent contractors when they should be classified as employees. Misclassification can lead to tax issues, penalties, and even legal action.

Quick Tip: Review each role’s responsibilities carefully. If your business controls how and when someone works, they’re likely an employee under CRA or IRS guidelines. When in doubt, consult an accountant or HR advisor.

2. Not Using Reliable Pay Stub Tools

Failing to issue accurate or timely pay stubs can leave employees confused and put your business at risk of non-compliance. Manual processes often lead to inconsistent reporting or missed details.

Solution: Embrace digital tools to generate professional check stubs easily and accurately. Online platforms automate the math, ensure legal formatting, and help keep payroll records organized, making life simpler for both employers and staff.

3. Missing Tax Deadlines

Between federal, provincial/state, and local payroll tax obligations, it’s easy to overlook a deadline. But missed filings or late payments can result in steep fines.

Pro Tip: Set calendar reminders or use payroll software with automated filing features. Keeping a payroll tax calendar visible in your workspace can also help keep deadlines top of mind.

4. Inaccurate Overtime Calculations

Incorrectly calculating overtime pay is a common error that often stems from not understanding labor laws. This can lead to underpayment, employee dissatisfaction, and labor disputes.

Fix It: Stay current on overtime rules in your region. Always factor in additional hours worked beyond standard thresholds and account for bonuses or commission-based earnings when calculating rates.

5. Poor Record-Keeping

Payroll records must be retained for several years in most jurisdictions, and poor documentation can cause major issues during audits.

Best Practice: Use cloud-based storage systems or payroll software that automatically archives pay records, employee details, and tax filings in one place.

6. Forgetting Final Pay and Termination Rules

When an employee leaves, whether they resign or are terminated, employers are typically required to provide final pay within a specific timeframe. Missing this deadline can result in legal action or fines.

Reminder: Check your local employment standards for timelines. Also, ensure that unused vacation or benefits are included in final payments where applicable.

7. Mismanaging Benefits Deductions

Incorrectly withholding benefit contributions like health insurance, retirement savings, or garnishments can frustrate employees and lead to compliance headaches.

Quick Fix: Triple-check deduction setups in your payroll system. Regular audits (quarterly or biannually) help catch issues early before they impact your bottom line or staff morale.

8. Not Staying Updated on Regulations

Employment laws change often. Failing to stay informed can lead to outdated practices, which could make your payroll process non-compliant.

Stay Informed: Subscribe to updates from trusted sources, like your local Chamber of Commerce or labor department. Partnering with an HR consultant or payroll service can also keep you ahead of changes.

Avoiding Errors Equals Saving Time and Money

Getting payroll right is more than just a routine task. It’s a strategic part of running a compliant, trustworthy business. By understanding the most common pitfalls and implementing smarter solutions, like using digital tools for check stubs or setting automated reminders, you’ll save time, reduce errors, and create a more positive experience for your employees.