Updated: September 27, 2024

Debunking four common payroll myths

Published By:

Jon Davis

Business owner learns about common payroll myths

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Managing payroll can be a complex and daunting task for businesses of all sizes. Misconceptions and myths often abound, leading to confusion and potential mismanagement. To help you navigate this essential business function with confidence, we debunk four common payroll myths.

Myth 1: Small businesses don’t need payroll software

Some small business owners believe that payroll software is unnecessary or too expensive for their needs, especially if they only have a few employees. However, even small businesses can benefit from payroll software. That’s because it automates complex calculations, ensures compliance with tax laws, and frees up time that can be better spent on growing the business. Payroll software can also help reduce errors, provide accurate reporting, and offer self-service employee options, making it a worthwhile investment for all businesses.

Myth 2: Only employers pay FICA taxes to the IRS

The taxes that make up the Federal Insurance Contributions Act (FICA) are an essential part of the US payroll tax system, funding Social Security and Medicare. And though it’s a common misconception that only employers pay FICA taxes, the opposite is true.

 

In reality, FICA taxes are a shared responsibility between employers and employees. Both parties contribute to funding Social Security and Medicare to make sure that these essential programs are supported. Believing that only employers are obligated to pay these taxes is a misconception that overlooks the contributions that employees make to federal programs.

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Myth 3: All salaried employees are exempt from the rules of overtime

The misconception that all salaried employees are exempt from overtime rules is common and inaccurate. While some salaried employees are indeed exempt from overtime, not all salaried workers qualify for this exemption. The Fair Labor Standards Act (FLSA) sets specific criteria to determine whether an employee is exempt or non-exempt from overtime pay — salary is not the only factor. Accurately classifying your employees with objective criteria should be top of mind.

 

Incorrectly classifying an employee as exempt, when they do not meet the criteria, can lead to significant legal and financial consequences for employers. These include back pay for unpaid overtime, fines, and potential lawsuits. Therefore, it’s crucial for employers to accurately assess the exemption status of each salaried employee.

 

The belief that all salaried employees are exempt from overtime is a myth. Exemptions depend on both the specific duties of the job and meeting a minimum salary threshold. Employers need to carefully evaluate these factors to ensure compliance with overtime laws, while employees should be aware of their rights to receive fair compensation for overtime work. Misunderstanding this distinction can result in costly errors and legal liabilities.

 

Incorrectly classifying an employee as exempt when they do not meet the criteria can lead to significant legal and financial consequences for employers, including back pay for unpaid overtime, fines, and potential lawsuits. Therefore, it’s crucial for employers to accurately assess the exemption status of each salaried employee.

 

The belief that all salaried employees are exempt from overtime is a myth. Exemption depends on both the specific duties of the job and meeting a minimum salary threshold. Employers need to carefully evaluate these factors to ensure compliance with overtime laws, while employees should be aware of their rights to receive fair compensation for overtime work. Misunderstanding this distinction can result in costly errors and legal liabilities.

Myth 4: Managing payroll in-house is cheaper than outsourcing

Contrary to popular belief, outsourcing payroll can be more cost-effective than handling it in-house. Many businesses overlook the full scope of expenses involved by internally managing payroll. The actual costs go beyond the salaries of payroll staff and include other factors such as:

  • Employee Costs: Recruitment, hiring, training, and ongoing management
  • IT Support: Maintenance of payroll systems and troubleshooting issues
  • Payroll Software: Purchase, updates, and licensing fees
  • Security: Safeguarding sensitive payroll data

 

By partnering with a payroll outsourcing company, businesses can save on these expenses, reduce the time and effort required to stay up to date with changing legislation, and eliminate the costs associated with maintaining payroll software and IT infrastructure.

 

Instead of being a financial burden, payroll outsourcing can be a more cost-effective solution. It allows you to focus on core business activities while benefiting from cost savings and the assurance of compliance.

 

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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.