Do you run a small or mid-sized business? If you do, then how is your payroll system? Is it in order or is your payroll a total disaster? If it isn't as streamlined, accurate or organized as it should be, you could face huge problems. Here are some of the most common payroll mistakes and the potential consequences of not keeping a tidy payroll system:
Errors in Employee Classification on W-2 Forms
Not classifying employees properly is the one of the most common payroll mistakes. When this occurs, it can result in major employment tax penalties. In other words, sometimes business contractors classify workers as independent contractors to avoid having to pay the extra costs for Workers' Compensation, Social Security and State Unemployment.
Poor Record Keeping
Failing to keep accurate records is another sign of a messy payroll system as well as failing to gather the right data. Although it takes time, it's critical you keep a chronological history of everything pertaining to your business and employees since not doing so can result in having to pay hefty fines and penalties (including interest).
Breaches in confidentiality in your payroll can lead to problems. Your payroll system should be set up so that your employees cannot find out the salaries of their coworkers or even your salary.
Being Unaware of Tax Laws
Probably, the most dangerous payroll error is ignorance. If you're not up to date on all the tax laws, you'll suffer. You need to familiarize yourself with all the mandatory regulations and keep up-to-date as these change. This can be a very daunting task, which is one reason why it makes sense to outsource payroll to a PEO.
Rushing Through Payroll
Not taking the time needed for doing your payroll can lead to either underpaying or overpaying employees, resulting in employees questioning your abilities. What's more, when your payroll is inaccurate, your business could experience severe financial consequences during audit checks when the numbers fail to tally.
Potential Consequences of an Untidy Payroll System
- Payroll mistakes can lead to considerable financial loss for your company.
- Legal problems—Often, businesses are faced with audits and other types of legal actions because of payroll errors and messy record keeping.
- Productivity can suffer when you're forced to spend hours or even days searching for lost records, instead of working. As time is money, this can also cost you financially.
- When you spend valuable office time trying to correct payroll mistakes, it's easy for your employees to not be paid on time. Falling behind on a payroll schedule can affect company morale and lead to employees quitting.
- Data loss is another significant consequence. That's why you should have a backup plan in case records are lost. In the worst cases, companies can go bankrupt or even go out of business because of lost records, lack of compliance, or financial errors.
Other Warnings and Considerations
- Taxes are one the most complex features of payroll. Consider how it's easy to make errors in the withholding process because deductions can be either mandatory, or they can be voluntary.
- One way to determine if an employee is an independent contractor or an employee is by asking how much control your company has over a worker. The more control there is over a worker, the more likely he or she is an employee and not an independent contractor.
- If you have misclassified any of your employees as independent contractors, it's imperative that you immediately contact the IRS.
- Consider that part of a payroll system may entail paying money that an employee owes to someone else or a third party, such as garnished wages for child support. When this is overlooked or mishandled, your business can be affected.
- Stress to your employees the importance of informing the HR (Human Resources) department when there are changes in their employment histories.
- It's a good idea to have mandatory employee data checks on a quarterly basis to make sure that your payroll system is updated and accurate, regarding the information you have on them.
Get Help With Your Payroll System From Harbor America
You don't have to be a slave to your payroll. More and more business owners are discovering the benefits of outsourcing their payroll system to a PEO (Professional Employer Organization). This is just one of the many services we offer at Harbor America. Please contact us for a free quote and learn more on how you can find more hours in your workday.