Your business may be equipped with the latest and best technology, but it can still suffer financial loss when there are payroll mistakes. About 40% of small businesses pay an average of $845 annually in IRS penalties because or payroll errors-yikes! To make sure your business isn't contributing to that statistic, here are five top payroll mistakes and the best ways to avoid them:
Poor Record Keeping
Just a tiny error in your bookkeeping records can mean having to pay a considerable amount of money. When you have mistakes in your payroll records, it can affect the pay-cycle. What's more, it can result in having to pay penalties. That's why it's critical you keep precise and detailed payroll records. To prevent errors in bookkeeping, consider outsourcing to a virtual bookkeeper or an all-purpose PEO.
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 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 governing which specific documents to keep, these documents usually include W-4s, time sheets, pay stubs, and tax forms. Switching to an automated payroll software system or outsourcing to a payroll expert will mean you can access old records easily without taking up precious office storage space.
Being Late on Paying Taxes
Another common payroll error is being delinquent on paying your payroll taxes. In addition to having to pay penalties, late payments also mean accrued interest. To avoid this problem, be sure to the check the requirements of your city or state, regarding when income taxes are due. Working closely with an accountant or outsourcing your taxes are excellent ways to avoid late penalties and save time as well.
A huge payroll error is misclassifying employees. Misclassifying employees as contractors can mean having to pay enormous IRS penalties as well as back taxes.
To prevent this from happening, you need to determine if someone working for you is an 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 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
It's important you don't forget to reward your employees with Christmas bonuses and other gifts. Just be sure to record them just as you would any other type of wages.
Make sure to 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, as well as your state government.
Considerations and Warnings
- Before you'll able to invest money in your employees and your business, you need to know the amount of available money your business has at all times.
- If you're still using the old-fashioned paper method for payroll, consider switching to digital payroll management because it is much more accurate, not to mention more streamlined and efficient.
- Be sure to have your business registered long before taxes are due. Also, obtain the correct local, state and federal payroll tax ID numbers because you'll need to submit filings and pay the government on time.
- Don't miscalculate overtime wages. Keep in mind how overtime wages 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.
- Be sure your workers are paid on time by running payrolls at least four days in advance.
If you have to process payroll for a business, you probably already know this job can consume most of your time. Why not hand over your payroll management to a PEO, so you can spend more time running your business? Payroll administration is one of the many services provided by a PEO (Professional Employer Organization). Please contact us at Harbor America for a free consultation and to learn more about how we can help you save time and give you peace of mind. We provide services to small and mid-sized businesses.