Compliance with payroll laws is essential if you want your business to function smoothly. While you may have every intention of following those laws, many businesses make mistakes with their payrolls every day.
These mistakes can be expensive if government agencies spot them. You may be fined or subjected to penalties, and in some severe situations, you might even serve time. Here are 6 common payroll mistakes to make sure that your company is steering clear of.
- Classifying your employees incorrectly. This is perhaps the most common payroll mistake of all. We are living and working in a time when more and more workers fall under the category of independent contractors and temporary employees rather than permanent employees. This being the case, employers sometimes unintentionally misclassify their workers—for example treating employees as if they are independent contractors when in fact they are not. If you make this mistake, you will not be withholding taxes properly for that employee. You will also be denying them benefits which they are due. By the same token, it is vital to make sure you are properly classifying exempt and nonexempt employees. This affects overtime pay. If you are having difficulty correctly determining whether your workers are independent contractors or employees (and whether they are exempt or nonexempt), the best thing to do is consult with a certified public accountant, who can explain the technical differences in the relationships. Your CPA can also help you understand what you need to do to be compliant in either case moving forward.
- Improper withholding. In some cases, you may deduct withholdings from employees’ paychecks as a mandatory practice. In other cases, the withholdings may be voluntary. Regardless, mishaps with withholdings can be a major snag when it comes to tax compliance. Withholding mistakes may be related to classification errors like the ones discussed above, or may involve scheduling issues. They may also involve miscalculations. This is another area where a CPA can provide you with vital assistance.
- Filing and paying taxes late. The taxes which you withhold from employees’ paychecks need to be sent on time to the IRS as well as your state tax board, or you could owe fines and penalties. It is also vital that you file on time (which is not the same as paying). For most companies, the schedule will be biweekly or monthly. Keep careful calendars so that you are not subject to a 2-15% penalty for late depositing or filing.
- Forgetting about 1099s. While it is a mistake to misclassify employees as independent contractors, many companies also make payroll mistakes involving their contractors. The most common one is either forgetting to send out 1099s or deciding that they are unimportant. 1099s are very important, however, and you are expected by the IRS to follow through with them. If you do not send them out by January 31st, you could be fined $10-$30 for every form you failed to issue to the IRS. You may be fined another $250 per form (minimum) if you failed to send them to the contractors themselves. Looking for more information on 1099s? Read up on them here.
- Not counting bonuses, reimbursements or taxable fringe benefits as income. One way you may end up not making proper withholdings is if you are not defining “income” correctly in the first place. Income is not just the salary or wages you are paying your workers. It also includes the following:
- Bonuses, prizes, awards, gift cards, and so on.
- Reimbursements for expenses—travel or entertainment costs during a business trip, for example.
- If you provide your employees with fringe benefits such as spousal travel or membership at a country club, those also are considered a form of taxable income.
So make sure that you are adding all of these together. Do not forget about them with contractors either. A bonus paid to a contractor is income, just like a bonus paid to an employee. If your contractor is compliant, he or she will report the bonus and pay taxes on it, so you need to report it too on the applicable 1099.
- Failure to keep solid records. If you are not keeping comprehensive records of your payroll and tax procedures, you will have nothing to reference if you ever do find yourself under government scrutiny during an audit or other inquiry. You also will have a harder time spotting mistakes and streamlining your procedures to make them more efficient and accurate.
Conclusion: Avoiding These Common Payroll Mistakes Can Save Your Company Time and Money
Payroll mistakes are common, but they are also expensive. Thankfully, they are also largely avoidable through compliant, up-to-date accounting procedures. Contact Alan M. Brown today at (760) 212-4993 if you need assistance managing your company payroll.