You may be perfectly content with your administrative processes, but if you aren’t careful, payroll mistakes will happen. They can make your business suffer significant losses both financially and in credibility with your employees. About 40% of small and medium-sized businesses end up paying IRS penalties due to common payroll errors. Yikes!
Payroll errors occur pretty easily, especially if you process your payroll manually. To make sure your business isn’t at risk of a costly situation, here are five common payroll mistakes and the best ways to avoid them.
A tiny error in your bookkeeping records can mean you have to pay a considerable amount of money in penalties—money that could have been put toward other areas of your business. When you make bookkeeping mistakes, it can negatively affect the pay cycle for your employees and result in having to pay hefty fines or penalties. It also makes for less-than-satisfied employees.
It’s critical that employers keep precise, detailed, and up-to-date payroll records. This will set you up for success and make it easy for you to trust the accuracy of past payroll data.
Failing to Keep Old Payroll Records
Even if your payroll records are meticulous, they won’t do you any good if you destroy them too soon. The United States Department of Labor (DoL) requires that payroll records must be kept for at least three years.
You may live in a state that requires maintaining payroll records even longer. Although, different states have different requirements that govern which specific documents need to be kept. These documents usually include tax forms, timesheets, and pay stubs.
Switching to an automated payroll software system or outsourcing to a professional payroll expert means you can access old records easily, at any time, without taking up office storage space.
Late Tax Payments
Another common payroll error is being behind on submitting your payroll taxes. In addition to having to pay penalties, late payments also mean accrued interest. This problem, though costly, is definitely avoidable. Be sure to check the income tax requirements of your city or state regarding payroll tax due dates. Working closely with an accountant is an excellent way to help avoid late penalties and save valuable time as an employer.
Misclassifying employees is a significant payroll error. This can lead to having to pay enormous IRS penalties, as well as back taxes (taxes that have been partially or fully unpaid in the year they were due).
To prevent this from happening, you need to determine if someone working for you is a full-time employee, part-time employee, contract employee, temporary employee, on-call employee, or an independent contractor. If someone is classified as an employee, you have to pay a certain portion of Social Security taxes and Medicare taxes on their wages. However, this is only a requirement for your employees as it doesn’t apply to independent contractors.
Not Including Bonuses and Gifts
Rewarding your employees with holiday bonuses and incentives is a great way to keep morale up and build a positive company culture. Be sure to record them just as you would any other type of wage, or you could be stuck with a costly penalty—which can cost up to $5,000.
Include the correct value of any gifts, awards, and other prizes on your employees’ annual W-2 forms. This should be done under the wages section. If you don’t do this, then it’s likely the bonuses and gifts would be considered under-the-table wages, which can get you in trouble with the IRS and state governments.
Considerations and Warnings
It is crucial to have your business registered with the IRS long before taxes are due. Make sure to obtain the correct local, state, and federal payroll tax ID numbers, which are important for filing. You’ll need to submit filings and pay the government on time.
As an independent business owner, things like taxes and payroll can get a bit tricky—especially with all the other important administrative duties you’re responsible for. Consider switching to a digital payroll management system if you’re still using the old-fashioned paper method for organizing and processing payroll. It will make your life as an employer a heck of a lot easier.
Digital payroll management can help with things like making sure your employees are paid on time and dealing with overtime wages. It can be easy to miscalculate overtime wages, especially since they are not the same as regular wages. Failing to pay the right overtime rate can result in having to pay penalties, along with interest and back wages. A digital payroll management system will improve your accuracy with a much more streamlined and efficient process.
If you have to process payroll for a business, you’ve probably experienced how time-consuming the task can be. Why not hand your payroll management over to a PEO, so you can spend more time focusing on running your business? Payroll administration is one of the many services provided by VensureHR. Schedule a payroll services consultation today to learn more about how we can help you run your business better and save both time and money.