Payroll is one of the most important aspects of any business. But it’s one that, when running smoothly, business owners don’t tend to think about. However, when there’s a payroll errors, it jumps to the forefront of an owner’s mind. Here are several payroll mistakes that can cost you a bundle and how to avoid them in your business.
1. Misclassifying Employees
Employees are classified when you hire them . For example, if you hire an office staffer to answer phones and file paperwork for an hourly wage, that is a non-exempt employee. Alternatively, if you employ an individual as a salaried Head of Operations, they are exempt. The main difference is that non-exempt employees are eligible to receive overtime pay; exempt employees are not. However, if each is employee is classified incorrectly, this could cause payroll errors.
Read more about payroll taxeshttps://www.pargofinancial.com/blog/5-common-and-costly-payroll-errors-and-how-to-avoid-making-them/
There is also a distinction between employee, freelancer, and contractor. Regular wages are paid to employees, freelancers and contractors are typically paid per project. Misclassifying employees, which causes payroll errors, may not seem like a big deal at first. But in time, the IRS will find out, and your business will end up paying the payroll taxes due, the associated fines, and of course, the interest on the past-due taxes.
Avoid payroll error issues
Understand the classifications and the capacity in which you hire your employees. To classify employees, be sure to use IRS definitions. The IRS defines independent contractors this way: “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
2. Miscalculating Pay
There are many possible payroll error aspects to consider. Such as overtime, commissions, deductions, paid time off (PTO), and more. When calculating pay, payroll admins should keep in mind that different policies apply to each state. For example, the federal overtime law dictates that overtime wages (pay for hours worked over 40 hours in a workweek) are paid at 1.5 times the employee’s regular hourly rate. However, some states have different policies regarding overtime. For example, in Alaska, California, Colorado, and Nevada, overtime is also based on hours worked in a day. As a general rule, a business should comply with the more generous law for the employee.
In addition to overtime pay miscalculations, poor time tracking capabilities also contribute to miscalculated pay. To avoid an issue miscalculating pay, be sure to know your state’s guidelines on overtime pay. Be sure that your company has a reliable tracking system for keeping up with employee hours so that pay, overtime, and other payroll aspects like PTO are correct. This process will significantly reduce the chance of payroll errors, such as overpayment or underpayment mistakes that could become costly payroll corrections.
3. Missing Deadlines
One of the most damaging payroll mistakes for a business is missing payroll tax deadlines. Missed deadlines can cost thousands of dollars in penalties.
To avoid this critical error, use the IRS Calendar Connector to help you remember your tax deadlines. However, if you miss a tax deadline, contact the tax agency immediately because late payment penalties pile up quickly. The quicker you get in touch with the IRS, the lesser penalty you will have to pay.
4. Messy Recordkeeping
An audit, is a word a small business owner least likes to hear? There are likely a few, but “audit” has to be right at the top of the list The price you pay for not doing that could be fines, penalties, and a plethora of costly payroll error-related tax issues.
If you accidentally file W-2 forms late, you will pay between $50 and $260 in fines depending upon how late the W-2s are filed.
The same goes for late-filed 1099 forms or any other tax-related documentation. The fines vary. For example, if you do not provide a contract employee with a 1099 form, that’s a $250 fine.
To avoid this issue, keep accurate, complete, up-to-date payroll records for all employees. Mind your paperwork like W-2 forms, timesheets, 1099 forms, and pay records. Also, be sure to retain employee records for the four-year minimum that the IRS requires after an employee leaves your company. FYI: The SBA recommends retaining payroll records for six years.
5. Missed Tax Forms
An extension of point four above targets the end-of-year task that some payroll admins dread – preparing and sending all the necessary tax forms to all employees, whether they are full-time (W-2), part-time (W-2), or independent contractors (1099).
Is required to be sent to an independent contractor who earned $600 or more during a tax year.
Payroll-related tax issues are avoidable. Take time to speak to your trusted tax preparer or CPA today so that you avoid these mistakes and keep your business running as it should.
Payroll errors don’t have to be a problem