Top 5 Startup Payroll and HR Mistakes
Startups are natural rule breakers. You’ve got to ruffle a few feathers and disrupt the status quo if you want to build the next Facebook. But there’s one area where startups definitely don’t want to break the rules: payroll and HR.
Startups that don’t comply with payroll and HR laws can face serious legal and financial consequences. Some penalties are even severe enough to drive them out of business. With that in mind, we’ve put together this list of the Top 5 Payroll and HR Mistakes that every startup should be absolutely sure to avoid.
1. Commingling personal and business finances
In the early days of a startup, founders may be tempted to put off separating personal and business finances for as long as possible, reasoning that they can save time and money by paying employees and contractors directly out of their own pockets.
This is short-term thinking than can have dire consequences down the road. Eventually that startup will have to disentangle all its expenses and pay back taxes.
If the startup is ever sued or audited, a blurry distinction of personal and business expenses can render a founder’s personal assets vulnerable to court seizure. A startup could even be stripped of its corporate status. Most founders think, “That will never happen to me.” But it often does.
2. Misclassifying employees as independent contractors
Treating an employee as an independent contractor is one of the most costly mistakes a startup can make. Employers do it because they don’t have to pay taxes, insurance or overtime to independent contractors. They also don’t have to give contractors benefits.
Misclassification is especially common in startups, where many practice “try before you buy” hiring. Yet if the responsibilities of the job don’t materially change when an contractor “converts” into an employee, the IRS considers that worker as having been an employee all along.
There are the state penalties, too. In California, the penalty for deliberate misclassification ranges from $5,000 to $15,000 for each violation.
What makes an employee? It varies state-by-state, but the basic legal definition relates to how much “control” an employer has over when, where and how an employee works, and for how long. If the length of her engagement is indefinite, then she’s an employee.
3. Managing payroll AND compliance
Payroll is so hard to do, and business screw it up so often, that the IRS penalizes about 1 in 3 business for payroll errors. The complexity of managing quarterly tax withholdings at the local, state and federal level…. it easily adds up to a full-time job, even for a business with just a couple of employees. That’s why most businesses use a payroll service.
But payroll services only get you so far. Startups still need compliance, like Worker’s Comp, EPLI and Unemployment Insurance. These are required in most states, including New York and California. Then there’s new hire reporting, I-9 documentation and healthcare. Compliance overhead in even the smallest of startups quickly escalates.
That’s why many savvy startups use a Professional Employer Organization (PEO) to manage payroll and compliance. A PEO manages a startup’s payroll, including myriad taxes, and ensures compliance with all required insurance and reporting. A PEO can even offer great deals on healthcare plans and other benefits.
4. Overpaying for healthcare and benefits
Startup competition is fierce these days. If you want to attract top tier talent, especially developers, you’ve got to offer excellent benefits, particularly healthcare.
But even “good enough for now” healthcare plans are expensive, particularly for smaller companies, who pay more for less coverage. It’s the law of leverage at work: the larger the company’s employee base, the sweeter the deal.
What’s a startup to do? Consider a Professional Employer Organization (PEO).
A PEO is a company that uses a legal arrangement known as co-employment to bargain for and administer healthcare and benefits packages, thus securing better terms than a startup could on its own.
PEOs offer savings on medical, dental and vision plans, as well as 401(k), typically available only to much larger companies. PEOs even handle the burdensome paperwork of regulatory filings and plan administration.
5. Frustrating employees with endless paperwork and confusing software
Nobody likes paperwork, especially not fast-moving startups. Yet many businesses continue to use outmoded HR processes and legacy software. Stop the madness!
BY: Justworks
Fortunately PEO Brokers of America makes it easy for a new business to get started with a PEO. Starting a business is hard enough without the frustrations of knowing the laws regarding payroll and HR.
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