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Not knowing or failing to comply with payroll laws can put your business under a magnifying glass, and lead to fines and penalties. In fact, the Internal Revenue Service (IRS) penalizes nearly 1 in 3 businesses for payroll mistakes. To avoid being one, don’t get tripped up by these common payroll mistakes:
- Poor Record Keeping and Inaccurate Data
Poor record keeping and data entry mistakes can result in overpaying or underpaying payroll taxes. When it comes to record keeping, the law requires that you hold on to the following documents for at least four years:
- Canceled checks
- Tax forms
- Proof of past payments
It’s also important that employee information be 100 percent accurate. After your employees fill out their W-2s, make sure to double-check the following information:
- Employee’s Full Name
- Current Address
- Social Security Number
- Start Date
- Termination Date (If Applicable)
- Date of Birth
- Payroll Details, Including Hourly Rate, Overtime, Etc.
- Falling behind on payroll tax and filing deadlines
The government collects payroll taxes on a pay-as-you-go basis. Almost half of all small businesses get fined an average of $850 every year for late or missed payments.
There are two reoccurring payroll tax deadlines you need to remember. A biweekly or monthly deadline is set by the IRS to deposit both withholding taxes and your share of taxes. If you fail to make a timely deposit, you are subject to a penalty of up to 15 percent, depending on how late the deposit is. And, there are quarterly and annual returns that you must file with your W-2s.
- Withholding errors
There’s lots of potential slip-ups in the withholding process. Misclassifying employees is one way businesses screw up withholding. Other common mistakes include:
- Failure to withhold federal and state taxes
- Inaccurate calculation of pre-tax and post-tax deductions
- Making incorrect deductions from exempt employee’s salaries
- Excluding taxable fringe benefits like gift cards, awards, and bonuses
- Excluding specific expense reimbursements from the employee’s taxable wages
- Issuing incorrect W-2 forms
- Exempt or non-exempt?
A non-exempt employee (generally hourly workers) is entitled to overtime pay while an exempt employee is not. When your non-exempt employees work more than 40 hours in a week, you owe them time and a half. You can’t sidestep this overtime obligation by instead giving them comp time (take off for the overtime hours worked). Doing so violates the federal Fair Labor Standards Act (FLSA) and can leave your business vulnerable to a lawsuit.
An employee must meet three conditions to be exempt from overtime pay:
- Earn more than $455/week or $23,600/annual
- Is either salaried or on a consistent hourly schedule with a relatively unchanging paycheck
- Position is managerial, administrative (staff employees and not “on the line”), or professional (degreed like an engineer, doctor, or lawyer)
It’s wrong to assume that if an employee works overtime without advance approval, you do not have to pay for that overtime. It’s also never a good idea to ask an employee to work off-the-clock or reduce hours worked.
- Contractor or part-time employee?
Confusing an employee with a contractor can come back to bite you. Businesses are generally not required to withhold or pay any taxes on payments to independent contractors, who are subject to self-employment tax. If workers are your employees, you owe payroll taxes on their wages and taxable benefits. You can’t avoid payroll taxes on wages and taxable benefits by labeling workers as independent contractors if they truly are employees.
If you are unsure about a worker’s status, request an IRS determination by filling out Form SS-8. If you’ve already made the mistake of misclassifying employees, the IRS offers you relief through the Voluntary Classification Settlement Program.
As a small business owner, you’ve got a lot on your plate. Finding a trusted and experienced payroll provider will eliminate the confusion and stress that often accompanies paying employees, filing forms, and meeting all your tax requirements. Learn more about the Payroll benefits available through your NFIB membership