15 Most Common Payroll Mistakes (And How To Avoid Them)
Updated December 20, 2022
In this post, we’ll cover the top 15 most common payroll mistakes employers make – and tips on how to avoid them. Stay tuned for the “avoiding” part – it’s the most important thing you’ll read!
If you’re handling payroll yourself, some of these mistakes can be costly in fines and fees, no matter the size of your business. You are also liable for rectifying any issues made on your end.
1. Improperly Categorizing Employees as Independent Contractors
One of the biggest payroll mistakes that you can make is improperly categorizing an employee (Tax Form W-2) as an independent contractor (Tax Form 1099), or vice versa.
Employees have certain guaranteed rights, such as minimum wage or overtime, that they lose out on if you pay them as an independent contractor. And the government loses out on potential tax revenue if they’re paid as an independent contractor. Hint: the government likes revenue!If you are not sure how to classify them, message your CPA, review the free resources on our website, and you can even file a Form SS-8 with the IRS to have them determine the worker’s status.
2. Not Issuing or Reporting Tax Documents (1099s and W2s)
Anyone that you take on as an employee or an independent contractor should receive a document that reports the wages they were paid. The IRS requires a copy of this form, and the information needs to match.
Make sure you keep track of anyone you pay for work. Employees get W-2s, and independent contractors get 1099s. The summary of what they were paid helps them complete their tax documents, and it communicates to the government what sort of taxes are owed.
3. Missing Tax Deadlines
Make sure you issue any required forms by their deadline. The IRS offers plenty of time to get all the information settled and filed, and keeping everything organized ensures this is an effortless task.
Tax deadlines are not forgiving, so keep any payments you owe on time. Filing documents or making payments late often results in costly fees and penalties. Make sure you know your deadlines.
4. Calculating Net Pay Incorrectly
Net pay provides an essential baseline for the taxes paid, so it is vital to ensure the calculations are correct.
Most businesses running their own payroll opt to leave this up to payroll software such as Quickbooks, but mistakes can be made. Double or even triple-check the numbers often. Data entry issues happen, and the longer it takes to fix them, the larger the mess and the higher the penalties.
5. Not Filing Reports Quarterly or Annually
The IRS likes to keep track of what goes on financially, and there are plenty of reports that your business needs to file regularly.
These vary depending on the size of your business and your industry, so make sure you dig deep to discover what reports you need to file and how often.
Try to file documents as frequently as recommended; staying proactive will help you notice any errors faster and have a plan of action to rectify any payroll mistakes.
6. Not Tracking or Paying Overtime
Make sure you comply with all government regulations concerning overtime. The federal guideline indicates that employees receive 1.5 times their pay, but local laws may be more stringent. You are required to pay the amount in the better interest of the employee.
For more on this, please visit our article on “Overtime Laws.”
7. Failing to Repay Non-exempt Employees for Time Spent at Required Functions
Non-exempt employees are entitled to reimbursement for their time spent at functions you require for their employment, including certain entertainment and travel expenses. Failing to reimburse this amount can lead to issues with the employee and the government.
Make sure you reimburse them properly. With the proper plan, the reimbursement is not taxable to them, and you do not owe payroll taxes on it. When done correctly, you can include the travel and entertainment expenses in your deductions.
8. Failing to Pay Employees Recovering from Work-Related Injuries
The FLSA (Fair Labor Standards Act) requires businesses to pay employees for work-related injuries, including time spent:
- Waiting to receive treatment
- Recovering from the injury
- Receiving treatment for the injury
You cannot tell an employee to receive this treatment outside of normal working hours, and they must be compensated for that time.
9. Failing to Stay Updated on Payroll Legalities
The laws and rates surrounding payroll taxes change often, and the rate you started an employee at may no longer apply. Check-in often to ensure you adhere to current laws and tax regulations.
Failing to pay the correct rate often leads to penalties and interest.
The most common areas for these rate changes include:
- Medicare tax
- Federal income tax
- Social security tax
- Federal unemployment tax
- State unemployment tax
- State income tax
- Local income tax
As you can see, these changes happen at all levels. An annual check is usually sufficient, but checking more often can help you avoid these issues on a larger scale.
10. Ignoring or Missing Garnish Requests
Courts may issue a request for the employer (you) to withhold a certain amount of an individual’s paycheck. This does little to affect your course of business, but they count on the money being sent to a different person or institution for a certain period of time.
Make sure you handle these requests as soon as you receive them. The employer has the obligation to adhere to the request, and failing to do so can drag you into the drama even more.
11. Failing to Recognize Miscellaneous Cash or Gift Cards in Employee Income
There are specific rules surrounding the dollar value of gifts given to employees, which need to be reported as part of their income.
“Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.”[Source] IRS: De Minimis Fringe Benefits
12. Inconsistent, Late, or Failed Payments
The Fair Labor Standards Act (FLSA) requires you to pay employees on a defined schedule. If you cannot keep to this schedule, pay employees late, or your payments fail, employees have the grounds to pursue legal action against you.
In most cases, making sure employees get their payments is not a problem. There may be technical hiccups here and there, but make sure any issue is addressed promptly and that it does not repeat.
13. Incomplete Records
While a paper trail may be more comfortable for some, it opens up the door for:
- Lost or damaged documents
- Swapped timesheets
It is often easier to keep complete records online. The IRS suggests you have at least four years’ worth of:
- Records of hours worked
- Expense accounts
- Accident reports
You should also hold on to any other payroll information that might be relevant or useful in case your business is audited.
14. Overestimating the Benefits of Payroll Software
Payroll software like Quicken and Quickbooks is not always a perfect solution. Leaving everything up to a computer program eliminates human intuition that might notice some common payroll errors.
Update your payroll software often to make sure everything appears as it should. Even a minor issue can compound to create a mountainous issue down the line. You want to catch potential issues as soon as possible.
We encourage you to read our blog, “Disadvantages of Payroll Software,” for more detailed considerations.
15. Not Checking Credentials when Outsourcing Payroll
Handing off payroll responsibilities might make sense for your business. There are several professionals you can bring on to handle the work, including:
- Payroll companies
- Professional employer organizations (PEOs)
Check the credentials of anyone you hand information or responsibilities over to. If a payroll provider has a fidelity bond, it helps cover you (the employer) should the money ever go to the wrong person or entity. For example, you are protected if the wrong amounts are paid to the IRS or not paid at all.
But there is no legal or state requirement that a payroll company be bonded. So when you’re ready to outsource payroll, make sure you choose a reputable payroll provider like Pacific Payroll Group – we are not just insured but are bonded too!
How To Reduce Your Risk
Payroll is a straightforward task, but all the intricacies involved can make it seem monumental for a business dedicated to other responsibilities.
Staying proactive by tracking all the new legislation affecting employers can help you avoid the most common payroll mistakes. Staying on top of labor law poster guidelines, state and Federal changes, OSHA requirements, and the like will all help you avoid these worst-case scenarios.
Finding a bonded and insured payroll service can take the stress off your shoulders and prevent these issues from occurring. Regardless of the size of your needs, getting help where you need it gives you the opportunity to focus on the work that matters most.
Some employers don’t have time. Other business owners would rather not track every new law coming from Washington. Outsourcing your payroll (to a trusted provider) is an option that protects your business and your time.
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