Did you know the Internal Revenue Service penalizes nearly one in three businesses for payroll mistakes?* Don’t be one of them; avoid these common payroll mistakes:
1. 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.
- 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.
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 payroll taxes. If you fail to make a timely deposit, you are subject to a penalty of up to 15%, depending on how late the deposit is. And, there are quarterly and annual returns that you must file with your W-2s.
3. Withholding errors
There are lots of potential slip-ups in the withholding process. Misclassifying employees is one way businesses mess 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 employees’ salaries
- Excluding taxable fringe benefits such as gift cards, awards, and bonuses
- Excluding specific expense reimbursements from employees’ taxable wages
- Issuing incorrect W-2 forms.
A nonexempt employee (generally an hourly staff member) is entitled to overtime pay while an exempt employee is not. When your nonexempt employees work more than 40 hours in a week, you owe them time-and-a-half pay for hours worked beyond 40. You can’t sidestep this overtime obligation by giving them comp time instead (time off for the overtime hours worked). Doing so violates the federal Fair Labor Standards Act and can leave your business vulnerable to a lawsuit.
Under new federal overtime regulations due to take effect Jan. 1, 2020, anyone who makes less than $684 per week, or $35,568 per year, qualifies for overtime pay under federal law. This is up from the current salary threshold of $455 a week, or $23,600 annually. Above that threshold, an employee must hold a managerial, administrative or professional position to be considered exempt, among other requirements.
It’s wrong to assume that if an employee works overtime without advance approval, you do not have to pay for that overtime. Any time that you permit an employee to work – whether the overtime is authorized in advance or not – counts as working hours, and you must compensate them appropriately for that time.
5. Contractor or part-time employee?
Misclassifying an employee as a contractor can come back to bite you. Businesses are generally not required to withhold or pay any taxes on payments to independent contractors because contractors typically are subject to self-employment tax. But if the people you hire are more accurately considered employees, you owe payroll taxes on their wages and taxable benefits.
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.
Disclaimer: The above information does not constitute legal advice. As you have questions, we encourage you to contact your legal counsel to explore all legal advice.
* IRS statistic source
Heartland provides entrepreneurs with software-driven technology to manage and grow their business. The company serves more than 400,000 merchants nationwide, delivering trusted solutions for payment, payroll and human resources, point of sale, customer engagement and lending. Heartland is a leading industry advocate of transparency, merchant rights and security. Heartland is a Global Payments Company (NYSE: GPN). Learn more at heartland.us.