Any business with employees must have a method for running payroll. Many businesses feel payroll is a task they can complete themselves. It’s not recommended for a business owner to take on such an important task by themselves – payroll mistakes and related tax penalties remain one of the top reasons new businesses fail. Here are some of the common payroll-related mistakes businesses make.
Misclassification of Employees
A frequent error in payroll is the misclassification of employees, typically due to insufficient knowledge. Numerous organizations mistakenly categorize their workers as independent contractors, which denies them the same safeguards afforded to W-2 employees. This can lead to a loss of paid time off, minimum wage, and overtime, which some companies think saves them money but can actually cost them far more in the long run. Misclassifying employees results in expensive payroll penalties and erodes trust with employees. To ensure proper classification, delving deeper into laws and regulations is essential. If you’re unsure, it’s best to consult with an attorney to avoid potential penalties that can worsen over time.
According to the Virginia Department of Taxation, penalties for Virginia companies misclassifying employees as 1099 independent contractors can be $1000 to $5000 per misclassified individual. The lookback period can be up to 2 years. With the average business having 15 employees and accounting for an average turnover rate of 47%, the first-violation penalty can be as much as $29,000. Although the penalties may differ for your company if you are based in a state other than Virginia, there are similar penalties for every state. Please refer to the U.S. Department of Labor website and/or your own state’s department of taxation for further information.
Failure to submit paperwork and tax payments accurately and on time
Leaders often make the mistake of failing to submit tax payments and forms on time or at all, which can result in costly fines for businesses that miss deadlines. It’s not just salaries, commissions, and bonuses that need to be reported, but also taxable compensation such as stock options, employee rewards, and personal use of company vehicles. Submitting all necessary paperwork to the tax office before the deadline is essential to avoid penalties. Usually, mistakes occur because leaders are unaware of the decisions that need to be made.
It is advisable to arrange important documents and records in an organized manner to reduce clutter and steer clear of tediously long spreadsheets. The IRS website shows a chart that outlines penalties for late payroll tax deposits. The penalties range from 2% of the unpaid deposit up to 15% of the unpaid deposit, depending on how late the deposit is. For the average small business, this can be upwards of hundreds of thousands of dollars.
Hiring Individuals with Limited Experience for Payroll Management.
Another common misstep in managing payroll is delegating tasks to inexperienced individuals. Entrusting payroll to someone well-versed in the necessary protocols and procedures is crucial. Overlooking this aspect can result in complex situations with staff, ultimately jeopardizing the trust between employers and employees, and leading to further issues with compensation.
If your team lacks experience, especially in a startup, it can be challenging to manage payroll. To mitigate this, ensure whoever handles the task stays up to date with the latest news and laws that affect payroll. Additionally, evaluate the current payroll team and ensure they clearly understand any changes.
Miscalculating employee’s pay
An important matter to mention when discussing payroll mistakes is accurately calculating an employee’s pay. This can cause significant inconvenience for the employee and result in valuable time being squandered. If this issue arises, rectifying it can require several hours, days, or even weeks that could be better spent on revenue-generating activities. Such errors can affect both salaried and hourly employees alike. Examples of common mistakes are failing to issue paychecks for newly hired staff, incorrectly compensating employees on disability leave, or inadvertently overpaying or underpaying an employee. To avoid calculation mistakes, try using a reliable paycheck calculator.
Ensure accurate paychecks every time. Although errors can occur, there are methods to reduce the number of problems encountered. It’s essential to consider the benefits of getting payroll right, such as exceeding employee expectations and building trust. A flawless payroll process can be established by utilizing a dependable partner and integrated system.
Many small businesses ultimately find payroll to be a daunting tax. In addition to the common mistakes mentioned here, the probability of mistakes increases exponentially with the addition of other payroll-related tasks such as employee benefits deductions, garnishment payments, tracking of paid time off, etc. Reach out to your payroll experts at Humarq Business Partners to ensure this important task is handled accurately and efficiently.