It is that time of year again when companies begin preparing for end-of-year accounting and tax reporting. In less than three months payroll department will be issuing W-2s and W-3s; workers will begin filing their taxes with both the federal government and their respective states. In all the chaos of tax season, it will become apparent to some employers that they have made serious mistakes in their payroll processing.
Payroll mistakes are more common than most people know. Unfortunately, U.S. tax law has become so convoluted that it is almost impossible to keep up at times. This year could be especially troublesome thanks to some of the changes implemented as a result of the 2017 tax reform bill.
How about your company? Below are three of the most common payroll mistakes made by U.S. employers. Has your company ever had trouble with them?
1. Misclassification of Workers
One of the easiest mistakes to make can also end up being one of costliest for employers: improperly classifying workers. Get it wrong and your company could face stiff penalties for not withholding and paying income taxes, FICA, and FUTA.
For tax purposes, the IRS identifies two kinds of workers: employees and contractors. An employee is a worker who is on the company payroll and whose actions at work are completely controlled by the employer. A contractor is a worker who provides certain services or labor but whose actions are not controlled by the employer. The contractor is free to take work from multiple employers simultaneously.
Unfortunately, employee classification is somewhat vague. The IRS litmus test for determining employee classification is equally vague. It is very easy to make this mistake.
2. Not Paying Overtime Wages
BenefitMall, a Dallas-based payroll processing provider, says that another common mistake is not paying overtime wages. According to federal law, all non-exempt employees must be paid at least 1.5 times their normal pay rate for any hours worked in a single week in excess of 40. The confusion comes into play when trying to determine which employees are exempt and which are not.
Failing to pay overtime can result in IRS penalties including fines and civil damages. There have been cases in which businesses have gone under after facing stiff civil penalties.
3. Failing to Fund Payroll Accounts
The third mistake, failing to fund payroll accounts, isn’t as much of a legal problem as an accounting one. It is still serious nonetheless. Failure to fund said accounts means there’s not enough money to pay employees at the conclusion of the next payroll run. Then what do you do?
Unfortunately, some employers tap into their tax accounts in order to make payroll. This allows them to meet their obligations and keep their employees happy, but it puts them in jeopardy with federal and state taxing authorities. They have to repay the money taken from the tax account to stay out of trouble. This could set up an unending process of robbing Peter to pay Paul.
How to Avoid Mistakes
BenefitMall says that the best way to avoid payroll mistakes is to stop doing payroll in-house. Instead, turn it over to a competent payroll provider with a proven track record. Payroll providers like BenefitMall are the best at what they do because payroll is all they do. They are the specialists most qualified to handle payroll without compliance issues.
In the absence of payroll outsourcing, companies should at least upgrade their payroll systems to take advantage of modern technology. Computerized, cloud-based payroll systems are more efficient, more accurate, and more easily managed.