We all make mistakes, but on the payroll it seems like there are a lot of mistakes to make. Below is a list of 13 of the most common payroll errors I’ve seen and I’ve compiled them into a single list. I hope they are useful to you and can help you improve your own payroll system for your business!
First, don’t back up your system. Since the person who manages your payroll is likely a person, you can be sure that you will not be able to work every day. Make sure you have some means to keep running your payroll program without them. You also need to have a manual means of recording payroll in the event of a technology malfunction.
Second, do not issue 1099 forms. When hiring an independent vendor or contractor, it is important to remember that if you pay more than $ 600 for your services, you must file a 1099. Severe penalties are subject to anyone who fails to provide this form as it is an integral part of your external tax and employment records.
Then misclassify employees. Ensuring your employees are classified correctly is imperative not only for keeping good tax records, but different types of employees are subject to different pay and / or benefit packages. Make sure you comply with all state and federal laws regarding how your employees are classified and structured within your business.
Incorrectly labeled freelance contract workers is another mistake. Labeling all of your employees as contract freelancers is not a good way to avoid giving them compensation. Employment status is also closely watched by the IRS, and mislabeling employees is a good way to get audited and can have a huge impact on your worker’s income taxes and withholding tax.
Choose Exempt or Not Exempt. Employees classified as exempt are not required to accrue overtime. Simply putting an employee on a salary does NOT exempt him from overtime. Classifying an employee’s status requires familiarity with federal and state laws, and it may be different for different jobs.
Excluding travel and travel expenses of employees. As a general rule, increased travel and travel expenses are not considered taxable income for a subordinate. However, if said employee is traveling to a place of employment that is not in his permanent residence, his travel and commuting benefits must be provided.
Miscalculating unemployment for state taxes is a very common mistake. Being late or miscalculating your state unemployment taxes can cost your business your unemployment tax credit, which can be as high as 5.4%. You can also face a lawsuit if notice is not provided for employees who have been laid off from their unemployment benefits.
Incorrect recording of overtime can be fatal. There are state and federal regulations on overtime pay. It is not limited to 1.5 times the employee’s hourly wage and can take even more calculations to be precise.
Security for employee paychecks against scammers. Technology has helped companies large and small to be more self-sufficient and have more advanced tools for their activities. This same technology is also being used to trick you in some situations. Check fraud is very real, and you need to make sure your business is protected by watermarks or any other type of paper security method. Due to this fact, more companies pay their employees through direct deposit, which completely avoids the paper fraud method.
Mishandling employee debts to wages can be crippling. It is vital to withhold any type of wage garnishment, taxes, child support, or any other court-ordered paycheck withdrawals. Be sure to confirm with the state ordering the payment that you are deducting the employee’s check correctly.
The lack or acquisition of unsatisfactory records and data is deadly for your business. Almost 2% of all total payroll costs are due to record keeping errors. The Internal Revenue Service requires you to keep at least four years of records, and some states require an even longer file.
Remember not to correctly record taxable items. Federal tax laws require you to consider awards and fringe benefits subject to income and employment tax withholding. Gift cards are considered cash and should never be excluded from taxable wages.
And finally, not meeting tax schedules: Depending on how late a business is filing its taxes, it may be subject to late deposit penalties and interest rates. Depending on how late your tax payments are, the range can vary from 2% to 20%.