10 Common Payroll Mistakes That Cost Small Businesses Money

Payroll errors do not just create headaches — they create real financial liability. A single mistake can snowball into back-pay claims, penalty assessments, and even lawsuits. The good news: most payroll mistakes are entirely preventable. Here are the 10 most common payroll mistakes that cost small businesses money in Kansas, along with the likely consequences and how to avoid each one.

Mistake #1: Misclassifying Workers as Independent Contractors

This is the single most expensive payroll mistake an employer can make. A growing number of states apply an ABC test for worker classification, under which a worker is presumed to be an employee unless the hiring business can prove all three of the following:

• (A) The worker is free from the company's control and direction in performing the work
• (B) The worker performs work outside the usual course of the company's business
• (C) The worker is customarily engaged in an independently established trade or business of the same nature

Where Kansas instead relies on the federal common-law test, the IRS and your state workforce agency still look closely at how much control you exercise over schedule, tools, and methods — a contractor who looks like an employee on paper is a frequent audit target either way.

The cost: If your state unemployment agency determines you misclassified employees as 1099 contractors, you owe back payroll taxes (state unemployment insurance and any state disability or paid-leave withholding that applies) plus penalties that can reach 10% or more of all compensation paid to misclassified workers during the audit period. You may also owe back overtime, expense reimbursements, and workers' compensation premiums. The IRS adds its own penalties: 1.5% of wages for failing to withhold federal income tax, plus the full employer share of FICA with no employee offset.

Mistake #2: Incorrect Tax Withholding

Withholding the wrong amount of federal or state income tax is surprisingly common, especially when employees fill out their W-4 (or state withholding certificate) incorrectly, or when employers fail to update withholding tables after annual rate changes.

Common causes:

• Using outdated withholding tables (the IRS and most state revenue departments update these annually)
• Not collecting a state withholding certificate in addition to the federal W-4 where your state requires its own form, and assuming the federal W-4 covers both
• Failing to withhold state disability or paid-leave insurance at the correct rate where your state requires it
• Applying the wrong state unemployment insurance (SUI) rate for a new employer instead of the rate your state assigned you

The cost: Underwithholding income tax creates a trust fund liability — the employer is responsible for the tax whether or not it was withheld. The IRS Trust Fund Recovery Penalty (TFRP) can hold individual owners and officers personally liable for the full amount of unpaid withholding taxes.

Mistake #3: Missing Payroll Tax Deposit Deadlines

Federal payroll tax deposits (income tax withholding + FICA) are due on either a monthly or semi-weekly basis, depending on your total tax liability during the lookback period. State income tax and unemployment deposits follow your state's own deposit schedule.

The cost: The IRS charges a failure-to-deposit penalty that escalates:

• 2% if 1–5 days late
• 5% if 6–15 days late
• 10% if 16+ days late (or within 10 days of an IRS notice)
• 15% if not deposited within 10 days after the first IRS delinquency notice

Most states impose their own penalties for late deposits, commonly in the range of 10–15% of the unpaid amount plus interest.

Mistake #4: Not Tracking Overtime Correctly

Under the federal Fair Labor Standards Act (FLSA), overtime is time-and-a-half for hours worked over 40 in a workweek. A handful of states go further and add daily overtime (time-and-a-half after 8 hours in a single day) and even daily double time after 12 hours, plus extra premiums for working a 7th consecutive day. If Kansas is one of them, tracking hours by week alone will produce the wrong paycheck.

Example: An employee works 9 hours on Monday, 9 hours on Tuesday, and 7 hours Wednesday through Friday (total: 42 hours). Under federal law alone, that is 2 hours of overtime (42 − 40). In a state with daily overtime, it is instead 4 hours: 1 hour of daily overtime each on Monday and Tuesday, plus 2 hours of weekly overtime. The daily-overtime calculation is always more expensive, so check whether it applies to you.

The cost: Unpaid overtime claims typically carry a statute of limitations of 2 to 3 years (longer under some state unfair-competition or wage-theft statutes). An employee earning $25/hour who is shorted just 3 hours of overtime per week could recover well over $3,000 in back pay in a year — before penalties and attorney's fees.

Mistake #5: Ignoring Wage Garnishments

When you receive a wage garnishment order — whether for child support, tax levies, creditor judgments, or student loans — you are legally required to withhold the specified amount from the employee's paycheck and remit it to the appropriate agency or creditor. There is no option to ignore it.

The cost: An employer who fails to comply with a garnishment order can be held liable for the full amount that should have been withheld, plus penalties. For child support orders, penalties commonly run several hundred dollars per pay period of non-compliance, and you can also face contempt-of-court charges.

Federal law caps most creditor garnishments at 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage, whichever is less — and some states set an even lower cap. Applying the wrong calculation can expose you to liability from both the employee and the creditor.

Mistake #6: Using the Wrong Pay Frequency

Most states set a minimum pay frequency and specific payday rules for employers. Common requirements include:

• A minimum of monthly, semi-monthly, biweekly, or weekly paydays depending on the state and, sometimes, the type of work
• A maximum number of days between the end of a pay period and the payday, often 7 to 16 days
• Special rules limiting monthly pay to certain exempt executive, administrative, or professional employees
• Separate, often faster, deadlines for final pay to terminated employees

The cost: Late payment of wages can trigger waiting-time penalties in many states — sometimes up to a full day's wages for every day payment is late, capped at a set number of days. Final-wage deadlines for terminated employees are frequently much shorter than the regular payday schedule, so confirm your state's rule before an employee's last day.

Mistake #7: Filing W-2s Late

Employers must furnish W-2s to employees by January 31 and file copies with the Social Security Administration (SSA) by the same date. Most states with an income tax also require a state copy, often filed automatically if you e-file with the SSA.

The cost: IRS penalties for late W-2 filing (for tax year 2025, filed in 2026):

• $60 per W-2 if filed within 30 days of the deadline
• $120 per W-2 if filed more than 30 days late but by August 1
• $310 per W-2 if filed after August 1 or not at all
• $630 per W-2 for intentional disregard

For a small business with 20 employees, filing W-2s more than 30 days late costs $2,400 in penalties alone. Filing after August 1 would cost $6,200.

Mistake #8: Not Reconciling Payroll to Your Books

Many small business owners treat payroll as a separate process from bookkeeping, and they never reconcile the two. This leads to discrepancies that compound over time and become very expensive to untangle.

Common problems:

• Payroll liability accounts (federal taxes payable, state taxes payable, benefits payable) that do not match actual deposit amounts
• Wage expense on the profit & loss statement that does not match total payroll reports
• Mismatched quarterly 941 filings vs. annual W-2/W-3 totals — the IRS specifically checks for this discrepancy
• Unreconciled net pay amounts that create phantom cash imbalances

The cost: While there is no specific "failure to reconcile" penalty, the downstream consequences include IRS penalty notices for discrepancies between quarterly and annual filings, underpaid or overpaid tax liabilities, and costly CPA hours to research and fix errors retroactively. Reconciliation should happen every pay period.

Mistake #9: Ignoring State-Specific Requirements

Employers who are accustomed to federal payroll rules — or who have run payroll in a different state before — frequently underestimate Kansas's own requirements. Obligations that many employers miss include:

• Itemized pay stub requirements: many states mandate specific data elements on every wage statement — gross wages, hours worked, all deductions, net wages, the pay period dates, and the employer's legal name and address. Non-compliant pay stubs can trigger real per-violation penalties.
• New hire reporting: typically due within 20 days of hire (see our new hire reporting guide)
• State disability or paid-leave withholding: required in some states, at whatever rate and wage base currently apply
• Paid sick leave: a growing number of states and cities mandate paid sick leave accrual
• Meal and rest break compliance: required premium pay in some states for a missed meal period or rest break

The cost: State-specific penalties stack on top of any federal penalties. A single employee who is denied a compliant pay stub, shorted overtime, and not given a required break could generate thousands of dollars in penalties per year — before back pay or attorney's fees.

Mistake #10: Running DIY Payroll Without Understanding State Law

Many small business owners start by calculating payroll manually or using a basic spreadsheet. That can work for a very simple, single-state operation with few employees, but it becomes a high-risk approach once daily overtime rules, pay stub requirements, disability or paid-leave withholding, local minimum wages, and active enforcement enter the picture.

Common DIY failures include:

• Using federal-only tax tables and forgetting state income tax withholding
• Not withholding required state disability or paid-leave insurance, or applying the wrong rate
• Calculating overtime on a weekly-only basis where the state also requires daily overtime
• Not knowing that some cities and counties set their own minimum wage rates higher than the state rate
• Missing quarterly state wage-report filing deadlines
• Not tracking paid sick leave accrual and usage
• Producing pay stubs that do not meet the state's required-element list

How to Protect Your Business

The thread running through all 10 of these mistakes is the same: either a lack of awareness of the applicable rules, or a failure to implement systems that enforce compliance automatically. Here is a simple action plan:

1. Audit your worker classifications using both your state's test and the IRS common-law test. Reclassify anyone who does not pass both.
2. Use payroll software configured for Kansas. Confirm it handles any daily overtime, disability withholding, and pay-stub rules that apply to you.
3. Set up automated tax deposits through EFTPS (federal) and your state's e-file system. Never rely on manual reminders alone.
4. Reconcile payroll to your general ledger every pay period. Compare quarterly 941 totals to your year-to-date payroll reports.
5. Stay current on rates and deadlines. Minimum wage, unemployment insurance rates, and other figures change annually. Subscribe to your state's employer updates.
6. Consult an employment attorney or CPA for an annual payroll compliance review, especially if you have 10+ employees or operate in a city with local ordinances.

Frequently Asked Questions