Payroll mistakes, even considered small initially, can impact the finances and accounts of the business quite badly at later stage. Considering the imperativeness of payroll tasks related to both employees and payroll taxes, even a minute mistake, whether done unintentionally or deliberately, can result in huge losses for the business.
Some of the mistakes can land the business owner is serious trouble as opposed to just wrong details filled in a check. These mistakes should be avoided at cost all so as to steer clear from officials of Federal and State government. In order to guide the business owner from committing these mistakes, top mistakes of payroll are enumerated below:
- Wrong Classification of Employees to Independent Contractors
- Misinformation on Form W-2
- Not Depositing & Filing Tax on or Before Deadlines
- Mismatch of Employee Type of a Worker
- Incorrect Payments of Overtime
- Fouling Up Form 1099-MISC
- Mismanagement of Child Support, Garnishments or Levies
- Overlooking Other Items of Taxable Nature
- Incorrect Filing of Forms I-9
Wrong Classification of Employees to Independent Contractors
If you want to avoid managing your payroll system then the only way out is by not having any employees, which is not actually possible as with even just two employees you will have to payroll.
- In order to save up some extra expenses related to the employees like Worker’s Compensation, Unemployment Insurance of State and Social Security etc., many small business and startups features their employees as independent contractors along with providing salary and incentives through checks from Account payables.
- Although the change in the classification of employees as independent contractors would certainly save up from certain specific taxes, this deliberate mistake can land the business owner against the law as it is illegal.
- Before legally confirming your worker as independent contractor, ensure that the given questions result in ‘No’. However if the questions enumerated below answers ‘Yes’ then these workers are nothing but the employees of your business and not independent contractor:
- Are the work done and hours given to business controlled by you?
- Are their equipments needed accorded by you and your business?
- Are they forbidden by you to share their work load with someone else?
- For more detailed repercussions on the same visit www.irs.gov.
Misinformation on Form W-2
Form W-2 is the most common tax form filled by the employees compulsorily. This in turn results in small mistakes being there which can be simple or complex.
- This form needs to be provided and filled by each and every employee of your business by 31st January (if the date 31st January falls on Saturday, Sunday or National Holiday, then the last date considered will be the next business day). This form basically comprises of the wages and deductions of the employee for the previous year and needs to be filed by the deadline depending on the mode of filing chosen – paper or electronic.
- Some of the most common mistakes committed with this form are different names and wrong typing of the social security number. These errors result in wrongful payment and transfer to employees’ salary and issues revolving around the payment for Social Security. Another most repetitive problem is not filing details of items which are taxable in nature.
- Mismatch of social security number is one of the most common errors that the Social Security Administration has started a verification service for employees at 1-800-772-6270 which takes up to 5 employee information for free in one call.
- Other mistakes are quite easy to avoid as illustrated below:
- Dollar signs should be avoided at all cost within the boxes, as the optical scanner of the Government mistakes it for number 8.
- A font which is too large or light is another error that should be avoided. Instead font size 12 Courier should be used.
- One tip recommended by IRS Section Chief is to write down number in the middle of the boxes to avoid any mistake.
- Social Security Administration can be contacted for more details on the same at www.ssa.gov.
Not Depositing & Filing Tax on or Before Deadlines
Once you have missed the deadlines issues by the State or Federal Government for depositing and filing payroll taxes, the penalties for the same is quite heavy.
- The most fundamental task of every business owner, payroll experts, accountants and bookkeepers is to be familiar with all the deadlines set by the municipal, county, state or federal deposit and filing of taxes for the year in order to avoid penalties or fine. Along with this earnings and withholdings of each and every employee is also to be reported as well as the contract worker payments and other required details asked.
- The schedule of your accounts and yours is quite tight without adding on the liability of keeping track of deadlines along the way. However, if you miss even one deadline it will come back to haunt you in terms of heavy fine levied by the government.
- In the case of your yearly tax obligation towards Federal government amounting to $200,000 or above then it is preferable to use Electronic Federal Tax Payment System (EFTPS) for the payments. Irrespective of the size, any company can reach this height faster than ever imagined as the taxes include everything from corporate and payroll taxes to pensions.
- To gain more information on the same, visit www.irs.gov
Mismatch of Employee Type of a Worker
The main aspect of this is to know whether the employee should be paid for overtime or not.
- As per FLSA (Fair Labor Standards Act) imposed by the Department of Labor of the U.S., a set of rules are formed for this. The rule is simple, that is, employees accorded with fixed salary per month are not eligible for overtime; however employees paid on the basis of the hours or per day are not exempted from overtime payment rule. The rule is set clearly by the government and need to be followed accordingly only.
- It is imperative to be familiar with the rule and play safe with it. All that a frustrated employee has to do go online and learn about the rule for bringing the business down in case the business is not adhering to the rule completely. All they have to do is look up the standard set by the government before lodging a big case against the company.
- More details on the same rules can be looked up via the U.S. Department of Labor at www.dol.gov
Incorrect Payments of Overtime
It is common belief that the employees paid per hour or day are entitled for overtime equivalent of time and a half after completing 40 hours in a week. Well this is not always true.
- As per the rules and regulations set by the labor department and the government, the employee should be paid accordingly. The important question here is whether the calculation for overtime is being done properly or not. Many businesses prefer to grant employees with comp off or compensatory overtime instead of paying the correct amount for overtime. It is illegal and is not acceptable by many states. Under the FSLA ruling only some agencies of the State or the federal government are allowed for comp off which is still likely to be not considered as per some exclusions.
- It is not imperative for the overtime to be 1 and a half day salary of the employee. Some businesses do add the bonus of production or difference in shift timing while calculating the perfect overtime payment of the employee. These rules are however a complete change in California since 1st January 2003
- In choosing between the rules of the Federal or State opt for the state in case you find them more amenable than the Federal ones.
- Get in touch with the National Association of State Workforce Agencies at www.icesa.org and www.dol.gov.
Fouling Up Form 1099-MISC
As per IRS, the forms required for independent contractors also at times are riddled with mistakes done by the company
- At times of providing services outside without being incorporated, many businesses are required to fill out a form called 1099-MISC as received from the customers or clients in order to provide the correct amount in lieu of services accorded to them for the current calendar year. Irrespective of the size and breakdown of the business, Form 1099-MISC need to be filled and provided for reporting all the payments above $600 or more to all the independent contractors.
- This Form 1099-MISC needs to be deposited and filed by 31st January to all the independent contractors and to IRS by 28th February. Delay in filing can result in huge penalties.
- One of the easiest ways to acquire needed details is by sending a Form W-9 to the vendors before forwarding and paying the invoice. This form asks for the name, Tax ID Number and address. Ensure all the details are provided correctly without any mistakes. Mismatch of name with that of the Tax ID Number is the most recurring mistake done in Form 1099.
- For more information, visit www.irs.gov
Mismanagement of Child Support, Garnishments or Levies
At times businesses do need to pay owed money of the employee to a particular third party.
- Once long ago, the federal and state government came to the conclusion that the best way to complete the debt of an individual towards the government is by directly approaching the source of income, that is, the employer and deduct the required amount from the salary of the employee.
- Suppose the employee has a case going on in the court and opposing party wins the case making them entitle to take it from the wages of the employee. The employer needs to withhold the amount, write in a check and then send it to the winning party. Employees having child support orders from the court follow the same rules but the amount is taken off from the payroll deductions. Some businesses can apply levies on the salary.
- Irrespective of the size of the business, all the company owners consider this to be dilemma. Considering the rules of withholding, as employee can only retain some amount and also decide which claims need to be met first in cases of multiple claims. Once the State gets involved in Child Support case, naturally that claim gets first priority. However, if the tax levied by federal government comes in first that is deducted in priority.
- For more information, visit www.irs.gov.
Overlooking Other Items of Taxable Nature
Apart from just wages, other taxable items need to be withheld too.
- Apart from basic wages, all the other incentive items like gifts, bonus, awards and prizes are to be accounted for and withheld taxes for the same including according company car to the employee.
- As opposed to wages, withholding taxes on these items can be done in various ways. The amount can be paid via a normal check which will garner tax at normal rate only. In case it is paid separately then the tax will be levied on supplemental rate of 27 % as set since 2003. You can also show these items under gross rate which ensures tax paid is on the gift only. However, ensure that you keep providing such gifts and incentives, despite the complex tax charges, as these items boost the morale of the employees.
- Visit www.irs.gov for more details.
Incorrect Filing of Forms I-9
The INS (Immigration and Naturalization Service) of the US demands a form too for each and every employee.
- Initially started in order to figure out those employees of foreign soil who are not eligible to work in the USA. This form, now, is imperative to be completed and be with updated details of the employee and can be presented for inspection at any time. It is compulsory for every employee of the company taken on after 8th November 1986, irrespective of the fact that whether the employee is a citizen of the US or not. The penalty for incomplete forms has risen up to $1000 since 2003.
- However, it should be kept in mind that the penalty levied will be nothing in comparison to harrowing problem you will land into for employing illegal worker who is still employed in your company and will be given pay as you were before along with proper reporting must be done for the employee irrespective if they have a legal Social Security Number or not.
- The U.S. Immigration and Naturalization Service (INS) at www.bcis.gov can be contacted for more details.
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