Small Business Bookkeeping

Payroll mistakes are not just HR problems. They are accounting problems. They distort your books, cause incorrect tax filings, and create headaches for your CPA months down the road. Payroll sits at the center of your financial system. Every expense, liability, and deposit flows straight into your accounting. When payroll breaks, everything downstream shifts with it.
 

Below are the most common payroll mistakes I see, how they start, and why they create far more trouble than most owners expect.
 

1. Running Two Payroll Providers at the Same Time
 

This issue usually happens when a business grows faster than its systems. A creative agency I worked with had this exact situation. They kept the owners on their original payroll system and started new hires on a larger provider. The plan was to merge everything later.

Payroll filings do not care about “later.”

Each payroll provider automatically files its own 941 and 940 for the same EIN. When both systems e-file the same quarter’s reports, the filings collide. The IRS ends up showing missing returns and missing payments even though the deposits were made. Fixing it requires a forensic payroll accountant to rebuild the filings manually and submit corrected forms. It took months.
 

If you ever change payroll systems, do it cleanly. Cut over at the end of a quarter, close the old provider, and make sure your accountant is involved. And always bring year-to-date employee data into the new system, including terminated employees. This is also a place where a bookkeeper can catch issues early. The moment they see two payroll withdrawals in the same period, they will flag it.
 

2. Paying Bonuses Outside of Payroll
 

This mistake is incredibly common, especially in businesses with sales-driven teams. A business owner wants to reward someone, so they write a check or make a bank transfer directly from the business account. Simple, but those payments never run through payroll. That means no withholdings, no reporting, and no W-2 record of the bonus income.
 

By the time the company realizes the mistake and tries to fix it, employees have already filed their personal tax returns. Now they need amended returns and often have to pay their tax preparer again. Even though the taxes were always owed, it feels like a financial hit after the fact, which hurts morale.
 

This is why accountants often recommend grossing up bonuses. If someone was supposed to receive one thousand dollars, the company pays closer to fifteen hundred so the employee still nets one thousand after withholdings. The employer pays the higher payroll taxes, but it preserves goodwill. The best solution, though, is simple. Run every payment to employees through payroll. Even gifts should run through payroll. Most providers allow a separate bonus run with just a few clicks.
 

3. S-Corp Owners Not Taking Payroll
 

This is one of the most common issues I see when someone hands off their bookkeeping. They have operated as an S-Corp for years and never paid themselves through payroll. They take only distributions and assume that is how S-Corps work. Many say they read online that payroll is optional.
 

You can take distributions, but the IRS expects reasonable compensation first. If you actively work in your business, you must take a salary. There is no exact formula for “reasonable,” but your CPA will consider industry wages, your time involvement, your role, and the company’s profitability.
 

Payroll makes the business look more credible. Lenders expect it. Buyers expect it. CPAs expect it. And it keeps the IRS from asking questions later.
 

4. Sending 1099-NECs to Employees by Accident
 

This one creates confusion for everyone involved. A remote bookkeeper sees a payment for one thousand dollars with no memo. They assume it is a contractor payment and record it that way. At year-end, they issue a 1099-NEC. The problem is that the person was actually an employee who already received a W-2.
 

The IRS and state agencies notice the mismatch and send inquiry letters. The employee then needs to file amended returns and sometimes participate in fact-finding interviews. I saw this happen to a client shortly before they joined my company. The state audit was far more extensive than the IRS inquiry.

The only time issuing both a 1099 and a W-2 is appropriate is when someone was a contractor first and then became an employee with no overlap in pay periods. Otherwise, it is a data entry mistake that turns into a compliance problem.
 

5. Missing Health-Insurance Reporting for S-Corp Shareholders
 

This issue appears in about half of all cleanup jobs I take on. The P&L shows “Health Insurance,” and the only employee is the owner. If you own more than two percent of your S-Corp and the company pays or reimburses your health insurance, those premiums must be included in your W-2 wages. They are taxable for income-tax purposes but not for Social Security or Medicare taxes.
 

This allows you to take the self-employed health-insurance deduction on your personal return. If the premiums are not included in your W-2, the IRS treats them as nondeductible personal expenses. Fixing this often means amending payroll reports, adjusting the books, and sometimes filing revised tax returns.

Different payroll providers handle corrections differently, and some, like QuickBooks Payroll, do not issue corrected filings once amendments are made. That leaves your accountant doing manual work.
 

If you ever want the company to pay for owner health insurance, tell your payroll provider first. They will set it up correctly.
 

Why These Mistakes Matter
 

These are not just payroll mistakes. They are accounting mistakes hiding inside payroll. Every one of them affects your tax filings, your reporting, and your decision-making. Clean payroll means clean books. And clean books mean faster closes, fewer surprises, and a CPA who does not have to spend days untangling avoidable issues.