Running a business means managing a ton of moving parts; payroll is just one of them. With so much going on, even within the payroll process itself, it’s easy for business owners to slip up. Not paying your employees or satisfying your governmental obligations, however, is not an option.
Keep an eye out for these payroll faux pas:
1. Missing tax deposits and filing deadlines
People are busy; they’re running a business and trying to grow it. That said, reporting and depositing taxes in a timely manner to federal, state and local taxing agencies is job one. Failing to do so can lead to costly penalties and interest charges, as well as frustration.
Let’s say it’s the 15th of the month and you’re swamped. You’re out on three calls with customers, and then there’s a fire drill you have to do. By the time you catch your breath, it’s the end of the day and you’ve missed your window to make that deposit, incurring a penalty.
By using an automated payroll processing system, this oversight can easily be avoided. Marking up – and sticking to – a calendar with all of the year’s deadlines is another helpful tactic.
2. Failing to keep up with changing payroll tax regulations
No matter the level of government, tax laws and regulations can change often and without notice. Mom-and-pop companies can miss these changes without subscribing to something like Bloomberg BNA or checking the IRS and state websites, all while running the rest of the business.
With an automated tax update service, a business owner can reach out to multiple tax bureaus for guidance on changes in tax law. Online payroll processing, for the most part, can also help with that.
3. Less-than-stellar data entry
The mismatching of employee names and Social Security numbers is so rampant among employers that the Social Security Administration (SSA) has established a special phone number for verification purposes.
An incorrect filing with the SSA can affect an employee’s future retirement. Additionally, failing to keep an accurate account of employee hours can distort payroll records and lead to costly penalties.
4. Discarding payroll records prematurely
Depending on which government agency you’re dealing with, payroll information must be stored for a specific period of time. Documents such as timesheets, canceled checks and W-4 forms should be retained for four to six years.
If you’re audited, failing to produce the requested documentation can lead to fines. Typically, the penalty is a certain amount of money per employee for whom you didn’t have the proper information. And those fines can stack up quickly.
5. Misclassifying employees
Not understanding the difference between exempt employees, non-exempt employees and independent contractors can lead to misrepresentations in reporting income and withholding taxes, as well as the mishandling of overtime.
A rise in the number of independent contractors, such as temporary workers and consultants, makes knowing the difference even more important. These workers, who receive $600 or more in compensation during a given year, expect to be sent their Form 1099 by Jan. 31 of the following year.
The Fair Labor Standards Act contains guidelines to help you figure out the category in which your employees belong and stave off any potential oversight.
6. Not properly handling garnishments
As an employer, it may be your job to withhold and pay money an employee owes to a third party. Whether it’s tax levies, child support payments or other garnishments, be sure you’re aware of the proper steps – and the proper timeframe – for doing so.
There’s a start and a stop process for each garnishment. If it’s been paid off and an employer continues to withhold it and remit it, it’s almost impossible for the employee to get that money back unless the employer reimburses them.
Mishandling or ignoring the garnishment process can lead to government penalties and fines. It can also damage employee morale and lead to increased turnover.
7. Withholding taxes at incorrect rates
This misstep can be triggered by several things, including legislative changes and special compensation that requires additional withholding percentages. Undershooting or overshooting tax rates can lead to monetary losses through penalties or just plain spending too much.
Bonuses are a good example of where people often fail to withhold enough taxes, simply because they’re unaware of the minimum amount to be taken out. Consulting IRS Publication 15 in this case and many others can help you remain within government compliance.
8. Not treating fringe benefits properly for taxation
Things like health insurance, life insurance, a retirement plan and/or an employee stock purchase plan can cause confusion when it comes to processing payroll. Some are considered pre-tax benefits and others post-tax. Not taking advantage of pre-tax benefits or treating post-tax benefits as pre-tax can be a costly mistake.
One of our clients was doing payroll in-house using payroll processing software. When the state unemployment tax returns were filed, the taxable wages were never reduced by the medical insurance and, therefore, too much tax was paid in.
Helpful resources, such as the IRS’s Taxable Fringe Benefits Guide, can help you gain a basic understanding of the rules regarding fringe benefits and how to report them.
9. Incorrect taxation of expense reimbursements
A business’s expense plan falls under one of two categories: accountable and non-accountable. With an accountable plan, expenses are reimbursed only if there is a business connection to the expense, the expense is documented properly, and any excess reimbursements are returned to the employer. Anything else would be considered non-accountable included among an employee’s taxable wages.
For example, you turn in an expense report for $400 without any receipts to support it and your employer reimburses you; or they give you a $400 advance toward expenses, and whether you spend it or not it’s yours. That $400 is taxable. But if you turn in receipts that substantiate expenses of $350, then only $50 is taxable.
10. Bringing ignorance to the table in defense of penalties
The IRS provides an option for repayment of delinquent tax bills known as abatement. With this option, employers can have the accompanying penalty or interest dropped from the bill.
But run-of-the-mill excuses need not apply. Employers must show reasonable cause for not being able to pay the entire amount due, and ignorance is never, ever a good reason. In short, you can’t claim that you didn’t know the law.
Employers aren’t going to win any arguments with government agencies by claiming ignorance, so don’t even try. Frontload yourself with knowledge, automate if possible and remove all doubt.
Learn how Insperity® can help you dodge costly payroll pitfalls.