5 Business Payroll Mistakes to Avoid
While it is clubs, balls and flaming chainsaws for jugglers, for small business owners, it is marketing, data security, customer service and payroll management to name just a few. Handling these responsibilities can be full-time jobs in themselves, which means that if not handled properly, errors can be made.
When payroll mistakes occur, the consequences can be huge. CKE Restaurants, the owners of Carl’s Jr. in LA, has recently been ordered to pay $1.45 million in penalties and back wages due to “an inadvertent payroll error.”
But it does not have to be this way. By knowing the five business payroll mistakes to avoid, you can ensure your business remains on a stable financial footing.
1. Haphazard payroll schedule
Paying your employees at irregular intervals can have a huge impact on your cash-flow and staff morale. Whether it is weekly, bi-weekly or monthly, having a regular payroll schedule is an absolute must.
Although there is no federal law that says how regularly employees should be paid, some states do have certain frequency pay requirements so if your payroll schedule is out of sync, then calculating tax payments can become difficult.
A case recently arose In Lansing, Michigan, where CATA announced it had paid $1.2 million in penalties and interest for late payment of payroll taxes.
Irregular payment to employees is not just inconvenient for them, it can also be harmful to your business. When staff morale is low, standards begin to drop – it’s human nature – and that means you will not be in the best position to service your clients.
By investing in small business payroll services that automate as much of your schedule as possible, you will be able to avoid the first of these payroll mistakes.
2. Gross vs. net payroll
The confusion between gross and net pay can be particularly troublesome if you do not have the right processes in place. At its most basic level, gross pay is the total remuneration involved in having an employee. It includes their basic wage, overtime, bonuses and any paid benefits, such as vacation, bereavement or sick pay. The net pay is what the employee receives after all taxes and deductions.
The difficulty arises when it comes to working out the employee’s taxable wage, as some benefits like qualified medical, dental and life insurance plans, could be tax-deductible. The IRS publishes a list of what is taxable and non-taxable income, and it is the employer’s responsibility to ensure that the right amount of tax is taken from an employee’s paycheck.
And all of this is before you get into the world of voluntary deductions.
To avoid the gross vs. net payroll error, you should get the advice of a qualified payroll provider who can help you manage your payroll.
3. Misclassifying workers
Does your business have employees, contractors, freelance workers or something in between? The distinction is very important as it has knock-on effects on payroll taxes and employee benefits.
If you have full control over the work the person does, where they do it from or you supply the materials they use, and payment to them is processed without the need of an invoice, then the IRS may choose to class them as an employee.
This very simple infographic on employee vs. contractor sums up the situation perfectly.
If workers are classified incorrectly, then you could expect to receive a penalty notice from the relevant authorities, and additional pay may have to be provided to affected employees.
To avoid this payroll mistake, you should draw up contractor agreements which will explain the responsibilities and remit of both parties. Alternatively, professional advice should be sought from a tax attorney or certified accountant.
4. Inaccurate recordkeeping
Poor recordkeeping makes the auditing process more difficult, and the longer it takes the bigger the impact it will have on your business.
You are required by federal law to keep accurate and up to date records on all your payroll activity for at least three years, although some states may request you keep hold of them for even longer. Therefore, it is always worth checking with your State Labor Office.
However, it is not just financials that you need to keep records of. You also need a safe and secure way of maintaining details on your employees, such as tax file number, full name and address, date of birth and start or termination date.
Data protection is very important, meaning the system you use to store all of this information has to be compliant with all necessary legislation. Carrying out research on small business payroll services and required methods for recordkeeping is one way to avoid this mistake.
5. Miscalculating tax payments
Taxes are not a one-time a year issue. Many small business owners are continually thinking about their tax liabilities throughout the year, and you need to stay up to date with the latest news. For example, the reporting due dates have changed for the tax year 2016 and there is always talk in Washington and state capitols of changes to tax credits or rates.
When you combine both federal and state payroll tax payment legislation, it can add up to hundreds of pages of legislation, but you will not be expected to know every page inside out. However, late payments, missed deadlines or simply not knowing what to pay will be no excuse should you be audited by the IRS.
Now that you’ve learned about these five mistakes to avoid, you can start focusing on your business’s payroll management. By being organized and staying up-to-date on payroll best-practices, your business can avoid making any errors.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.