Florida, USA — They are common in life, but when it comes to your company’s payroll, mistakes can have serious implications. Even what you may think is a minor blunder might cost your firm a lot. Payroll processing is becoming increasingly difficult for small and mid-sized business owners due to continually changing tax rules and regulations.
That’s a lot to keep track of, on top of all the other aspects of running a successful company. We’ve highlighted the top payroll mistakes businesses make to assist you prevent them.
1. Misclassification of employees as contractors
There are many various types of workers in today’s corporate environment, including consultants, temps, and independent contractors, which can make classifying them difficult. With the federal government pushing down on businesses that misclassify personnel as independent contractors, accuracy is critical. So, how do you figure out what kind of employee you have? In general, if the employer determines what type of work the worker will perform, when and how, the worker is considered an employee rather than an independent contractor. But making the decision isn’t always straightforward.
What happens if you make a mistake on your tax return and misclassify a worker? The employer will be responsible for paying state, federal, Social Security, Medicare, and unemployment taxes, as well as back benefits and possibly a fine, for that employee often with interest. If the IRS determines the misclassification was done on purpose, criminal and civil penalties may be imposed. A professional employer organization (PEO) with compliance skills can guarantee that workers are appropriately classified, reducing risk to your business.
2. Misclassification of Exempt and Nonexempt Employees
You might not think it’s a big deal if you unintentionally categorize an exempt employee as non-exempt, but it is, and it might expose your company to a wage-and-hour lawsuit, as this Fargo-based hotel owner did. Exempt employees are not entitled to overtime pay, although non-exempt employees are. Exempt vs. non-exempt employees are discussed in greater depth here. If a non-exempt employee is misclassified as exempt, they will not be paid overtime wages, regardless of how many hours they work in a week.
Here’s a suggestion: In general, an employee may be exempt if he or she performs particular job requirements and receives an annual pay in excess of a certain amount. The laws are complicated, and assuming that all paid staff are excluded can be dangerous for business owners. In order to properly pay your employees and prevent any potential fines, consulting with a Professional Employer Organization (PEO) skilled in this area is beneficial.
3. Deadlines Not Met
It’s vital to be on schedule with payroll and tax payments and filings. It’s easy to get caught up in the day-to-day operations of your company, but if you process payroll late, not only will your employees be irritated and lose faith in you, but your company will also be in violation of compliance rules. The Internal Revenue Service (IRS) usually mandates withholding taxes and the employer’s portion of taxes to be deposited biweekly or monthly.
On April 15, June 15, September 15, and January 15, some small businesses are obliged to submit quarterly estimated tax payments. When it comes to taxes, the system is “pay as you go,” and thinking that there is only one tax day each year, on April 15, will get you into trouble. If you don’t pay your income tax bill or payroll tax deposit on time, the IRS will charge you a monthly penalty.
4. Poor data entry and record keeping
A payroll audit is unpleasant, but there’s no reason to prolong it, which is precisely what happens when you don’t keep excellent records. You’ll have more peace of mind knowing you have the documentation you need if you follow state and federal payroll record-keeping laws. Payroll data must be kept for at least three years under federal law. The Small Business Association, on the other hand, advises keeping these records for at least four years. Check state and municipal rules as well, as some states require records to be kept for six years. W-2 forms, I-9s, timesheets, expense accounts, and pay stubs are just a few of the payroll records to save.
5. Ignoring Mistakes
Calculating taxes is challenging, and withholding errors are common. Failure to withhold federal and state taxes, incorrectly setting up employees’ tax information, improper pre- and post-tax deduction calculations, and wrong deductions from exempt employees’ wages are the most typical mistakes small businesses make. Keep form W-2 in mind. Issuing an inaccurate W-2 and supplying an employee with a 1099-MISC instead of a W-2, as well as not having a responsible strategy for employee expenditure reimbursements, are all common blunders. Finally, keep in mind that presenting presents to employees may result in tax consequences. Many fringe benefits, such as providing gift cards as a reward for achievement, are taxable, according to the IRS, and their value should be recorded as part of employees’ gross monthly income.
6. Overtime Pay Miscalculation
Employers must pay a premium for overtime under the Fair Labor Standards Act (FLSA). Unless an employee is exempt, federal overtime laws require that employees who work more than 40 hours in a week be paid at least time and a half their regular rate of pay. Some states have overtime regulations in addition to the federal ones, making overtime pay even more complicated. The employee is entitled to the higher standard in certain situations. In fact, one Texas employer discovered the value of overtime pay the hard way. In the amount of $608.05 in unpaid overtime earnings, the corporation made a mistake in overtime pay for an employee’s travel time. After all was said and done, one $600 blunder cost the corporation more than $45,000!
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