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 (almost) drive them out of business. With that in mind, we’ve put together this list of the five biggest startup payroll and HR mistakes to avoid.
1. Mixing Personal and Business Finances
In the early days of a startup, having a business bank account can seem like a bit of a pointless activity. Brand new companies are rarely making any money and it might seem to the founder that there’s no point in pretending like he’s paying his employees with company (not his own) money.
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 between 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, when they should in fact be legally considered an employee, 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 offer contractors benefits.
Misclassification is especially common in startups, where many practice “try before you buy” hiring.
3. Trying to Manage 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 mistakes. 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.
That’s why many savvy startups use a Professional Employer Organization (PEO) to manage payroll and compliance. A PEO manages payroll for startups, including 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 with 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? A PEO can again be helpful here. PEOs use a legal arrangement known as co-employment to bargain for and administer healthcare and benefits packages for all the companies under its umbrella, thus securing better terms than a startup could on its own.
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!
We’re in the 21st century and there’s no need to ask your employees to fill out forms and fax them to the government/healthcare company/other forces that be. There are several companies out there that are making software to help automate this and which help guide your employees step-by-step. When picking your HR system, prioritize something that works like your employees: online.