Everyone makes mistakes, but in payroll it seems like there are a lot of mistakes to be made. Below is a list of 13 of the most common payroll mistakes I have seen and compiled them into a single list. I hope they are helpful to you and can help improve your own payroll system for your business!
First, Not backing up your system. Since the person who manages your payroll is most likely human, you can rest assured they will not be able to work every day. Make sure that you have some means of still operating your payroll program without them. You also need to have a manual means of recording payroll in the event of a technological malfunction.
Second, Failure to Issue 1099’s. When hiring a vendor or independent contractor, it is important to remember if you pay them more than 600 dollars for their services, they have to file a 1099. Harsh penalties are subject to anyone who doesn’t provide this form, as it is an integral part of your outside employment and tax records.
Next, Incorrectly Classifying Employees. Making sure that your employees are correctly classified is imperative to not only keeping good tax records, but different employee types are subject to different payments and/or benefits packages. Make sure you adhere to all your state and federal laws in regards to how your employees are classified and structured within your business.
Improperly Labeled Independent Contract Workers is another mistake. Labeling all your employees independent contract workers is not a good way to avoid giving them compensation. The status of employment is also watched closely by the IRS, and improperly labeling employees is a good way to get audited and can greatly impact your worker’s income taxes and tax withholding.
Choosing Exempt or Non-exempt. Employees who are classified as exempt are not required to accumulate overtime. Simply putting an employee on salary does NOT exempt them from overtime. Classifying an employee’s status requires you to be familiar with federal and state laws, and can be different for different jobs.
Excluding Travel and Commuting Expenses for Employees. As a general rule of thumb, traveling and commuting expenses accrued are not considered taxable income to a subordinate. If said employee is traveling to a work site not located in his permanent residence, however, than his travel and commuting benefits will need to be provided.
Miscalculating Unemployment for State Taxes is a very common mistake. Being late or miscalculating your state’s Unemployment Taxes can cost your business its unemployment tax credit, which can be up to 5.4%. You can also face a lawsuit if notice is not provided for employees who have been laid off of their unemployment benefits.
Improperly Recording Overtime can be a killer. There are state and federal regulations on overtime pay. It is not limited to 1.5 times the hourly wage of the employee and may carry even more calculations to be accurate.
Security for Employee Paychecks against scammers. Technology has helped make businesses big and small be more self sufficient and have more advanced tools for their activities. This same technology is being used to cheat you in some situations as well. Check fraud is a very real occurrence, and you have to make sure your business is protected by way of watermarks or any other kinds of security paper methods. Because of this fact more businesses are paying their employees through direct deposit, which bypasses the paper method of fraud completely.
Mishandling Employee’s Debts from Wages can be crippling. It is vital to withhold any type of wage garnishments, tax levies, child support, or any other court-ordered paycheck withdraws. Be sure you confirm with the state that is ordering the payment that you are deducting the employees check correctly.
Lack of or Unsatisfactory Record and Data Acquisition is deadly for your business. Almost 2% of all total payroll costs are contributed to errors in record-keeping. The Internal Revenue Service demands you retain four years of records at least, and some states require even further archiving.
Don’t forget about not Properly Recording Taxable Items. Federal tax laws requires you to consider prizes and awards fringe benefits subject to income and employment tax withholding. Gift cards are considered as cash and should never be excluded from taxable wages.
And finally, not Meeting Timetables for Taxes: Depending on how late a company is on reporting their taxes, they may be subject to late deposit penalties and interest rates. Depending on how late the tax payments are, the range can vary from 2% to up to 20%