Top Payroll Mistakes Businesses Make in Q3 — And How to Fix Them

Avoid costly errors before heading into year-end

Q3 often brings a whirlwind of activity—summer schedules, strategic planning, and prepping for the final push of the year. Amid all this, payroll may not get the attention it deserves. But mistakes made now can snowball into costly problems by Q4.

Whether you're managing payroll in-house or through a provider, Q3 is a critical checkpoint.

It's far enough into the year to reveal patterns—and early enough to course-correct before year-end compliance hits.

Here are the top payroll mistakes businesses tend to make in Q3—and how to fix them before they become bigger (and more expensive) issues.

1. Misclassifying Workers as Contractors or Employees

The Mistake:Many businesses misclassify workers—especially seasonal hires or project-based freelancers. The distinction between a W-2 employee and a 1099 independent contractor isn't just semantics; it impacts taxes, benefits, and legal liability.

Why It Matters:Misclassification can trigger audits, back taxes, and penalties. According to the IRS, this remains one of the most common payroll errors.

Fix It:

• Review your worker classifications using IRS guidelines (see IRS Form SS-8 for clarity).

• Use the ABC test or economic realities test if you're in a state with stricter rules (e.g., California).

• When in doubt, consult your accountant or employment attorney—misclassification isn’t worth the risk.

2. Not Keeping Up With Mid-Year Tax Rate Changes

The Mistake:Some states or localities adjust payroll tax rates mid-year, especially unemployment insurance (SUTA) or paid leave contributions.

Why It Matters:If you're still using outdated rates, you may under- or over-withhold, leading to costly corrections or compliance issues.

Fix It:

• Double-check federal, state, and local tax updates from your state’s Department of Labor or tax agency.

• If you use a payroll provider, confirm they’ve applied the latest rates—and spot-check a few pay runs to verify.

3. Overlooking PTO Accruals and Leave Policies

The Mistake:Summer vacations can complicate tracking paid time off (PTO), especially in businesses that accrue it gradually or allow carryover.

Why It Matters:Improper tracking can lead to payroll inaccuracies, employee disputes, or liability at termination. It's also a compliance issue in states where PTO is considered earned wages.

Fix It:

• Audit your leave balances mid-year to catch inconsistencies.

• Make sure your HR system or payroll software tracks accruals based on your stated policy.

• Communicate any updates or clarifications to employees now—not during year-end reviews.

4. Ignoring Overtime Compliance

The Mistake:Summer schedules and seasonal fluctuations can lead to overlooked or miscalculated overtime for non-exempt employees.

Why It Matters:The Fair Labor Standards Act (FLSA) mandates overtime pay for hours worked over 40 per week—missteps here can result in wage claims or audits.

Fix It:

• Reaffirm which roles are classified as exempt vs. non-exempt.

• Review timekeeping systems for accuracy and consistency.

• Ensure managers understand that “off-the-clock” work—even after hours emails or prep—is still compensable time.

5. Falling Behind on Payroll Reconciliations

The Mistake:Some companies wait until year-end to reconcile payroll records—by then, fixing errors in pay, benefits, or withholdings can be time-consuming and stressful.

Why It Matters:Incorrect records can affect W-2s, 1099s, tax filings, and even employee trust.

Fix It:

• Perform a mid-year payroll reconciliation in Q3:

  • Compare year-to-date totals in your payroll system against bank statements and tax deposits.

  • Review benefits deductions, wage garnishments, and any manual payroll adjustments.

• Make adjustments now, while there’s still time to correct course smoothly.

6. Neglecting to Plan for Year-End Bonuses or Compensation Changes

The Mistake:Waiting until December to make compensation decisions without factoring in payroll taxes, limits (like the Social Security wage base), or cash flow.

Why It Matters:Bonuses are taxable income. Failing to plan can result in missed payroll tax deposits or IRS penalties.

Fix It:

• If you're considering Q4 bonuses or raises, forecast now.

• Factor in:

  • Employer payroll taxes (6.2% for Social Security, 1.45% for Medicare, plus FUTA/SUTA)

  • Contribution limits (e.g., 401(k) caps)

• Budget accordingly and communicate timelines early.

Final Thoughts: Q3 Is the Time to Get Ahead

Payroll mistakes don’t just hurt your books—they can erode employee trust and trigger compliance issues. Q3 offers a valuable window to identify and fix these issues before year-end deadlines and distractions set in.

By taking a proactive approach—auditing classifications, double-checking tax rates, and reconciling payroll—you’ll head into Q4 with fewer surprises and a stronger financial foundation.