Many employers don’t understand the intricacies and details of processing payroll. While payroll can be managed in-house, it is a complicated process and a mistake could be devastating – it could lead to resignations, low morale and maybe even IRS penalties. In fact, some studies have found that about 40 percent of small businesses have to pay an average of $845 a year in IRS penalties.
So, how do you avoid costly payroll mistakes? First, determine what the most common payroll mistakes are. This may include any of the following:
Setting up payroll incorrectly
Setting up payroll isn’t just about delivering pay to your employees – there are several other details to consider. You must register your business, classify employees correctly, and set up federal, state and local tax withholdings to keep the IRS happy.
Submitting deposits late
Companies must deposit taxes every two weeks to a month, but if taxes are high enough, they have to be deposited the next business day. When a company submits its deposits late, they can incur penalties and interest.
Classifying employees incorrectly
Whether an employee or independent contractor, it’s important to get the classification of each worker correct. The method for reporting compensation is different for each classification and other factors, such as benefits and taxes, are dependent on status. While companies may want to classify as many workers as possible as independent contractors because it lowers payroll taxes and employee benefit costs, giving the wrong classification can come back to bite you in the event of an audit.
Keeping incomplete payroll records
Employers have to maintain payroll records for the IRS. This means keeping four years of data from payroll records, such as time sheets, copies of W-2s and expense accounts. Copies of I-9 forms showing an employee’s eligibility to work in the U.S., as well as any state hiring forms, should also be included.
Most employers know managing employee pay is a critical component of running a company, yet 40 percent of small businesses will pay up to $1,000 a year in fines from payroll mistakes. Learning how to payroll properly can be an investment of time and money. To avoid payroll mistakes, it might be a good idea to hire a payroll service that can help you find the right payroll solution.