How to Avoid These Common (Yet Costly!) Payroll Mistakes
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You put a lot of time and effort into hiring the right people, and while it might feel like your responsibilities should end there, keeping correct payroll records is a critical aspect of properly running a business. In fact, payroll errors can hit you where it counts — right in your wallet — whether in terms of court settlements for your workers or penalties from the IRS.
Read on to learn how you can steer clear of some of the most common mistakes businesses make when they do payroll.
Using the Wrong Payroll Classification
Classifying your employees isn’t always as straightforward as you might think, and making the wrong choice is an all-too-common occurrence. Employers generally pay more to permanent employees due to the cost of benefits and employment taxes, and contract workers often cost more per hour but less overall.
Whether intentional or not, this is one area that is a weak point in many companies’ payroll systems. And as The CPA Journal explains, the IRS is paying close attention to this particular issue, since those employment taxes can really add up.
If you paid any part-time workers or freelancers more than $600 during 2020, you’ll need to send them a 1099-NEC (replacing the 1099-MISC). The form serves two important purposes—it allows you to report wage information to the IRS and enables your contractor to do their taxes. The contractor designation includes freelancers, contract workers, and even your company’s occasional handyman. You can file 1099 forms online, vastly speeding up the process.
On the other hand, workers who are considered employees will receive a W-2. Within your permanent staff, you also need to consider whether you classify them as exempt or non-exempt. Exempt employees are salaried workers, receiving the same pay regardless of how many hours they work, and non-exempt are hourly.
Non-exempt workers can receive overtime pay while exempt employees do not. Missed overtime pay might not feel like a big deal to the employer, but to put it in perspective, one company ended up paying almost $45,000 for a $600 error when all was said and done.
Sloppy or Incomplete Records
Some employers are under the impression that poor record-keeping can work to their advantage, thinking they are off the hook if the worker doesn’t have paperwork to reflect the hours they actually worked. However, that is a misconception, and in fact, the recording responsibility falls on the side of the employer.
Not only are employers the ones responsible for maintaining good records, but employees are also entitled to compensation for time worked, even if they don’t keep good records themselves. Make sure your company follows FLSA guidelines for both completeness and accuracy, and that payroll records are retained at least three years.
Missing Payroll-Related Deadlines
When you run a business, deadlines are an everyday occurrence. Unfortunately, certain payroll-related deadlines can be easily missed, especially if you don’t quite understand your obligations.
One of those obligations is payroll taxes. There are several rules relating to federal payroll tax deposits, and there are even training videos to help you know what to do. Because it can get confusing, the IRS recommends that you make your tax deposit on the same day you pay your employees. For instance, if your payroll taxes total $2,500 or more per quarter, your deposit might be monthly or else semi-weekly.
Your payment schedule would be based on a 12-month lookback period, and late fees are a percentage depending on how late you pay. Payroll taxes can either be paid by you electronically, through a trusted third party like your bank or accountant, or through a payroll service.
The other worrisome deadline relates to 401(k) contributions, and as Employee Fiduciary points out, there are always penalties if you’re late on these, and some can be quite severe. Basically, you have up to 15 business days after collecting an employee’s contribution to make your deposit. If you have a matching program, those deposits are made annually, and the dates are dependent on the size of your company.
While each of these errors is common, none of them are appealing, and all of them can cost you. Be careful in how you classify your workers, ensure you keep good records, and meet your payroll-related deadlines in a timely manner.
How to Avoid These Common (Yet Costly!) Payroll Mistakes by Lisa Walker