Costly Payroll Blunders

Everybody makes mistakes! When it comes to errors affecting your company’s payroll, however, it can be a disaster. When payroll issues occur it often causes problems with staff morale and can be incredibly complicated and time consuming to fix. Not knowing or failing to comply with payroll laws can put you and your company under a magnifying glass with government agencies costing fines, penalties and even imprisonment.

Here are some of the most common mistakes to avoid in payroll:

1. Payroll Tax -This is the biggest and potentially most dangerous mistake you can make with payroll. There are a number of different federal, state, and local taxes which may or may not apply to your business. Almost half of all small businesses get fined an average of $850 every year for payroll-tax penalties. The most common reason for these penalties is late or missed payments.
2. Poor Recordkeeping- According to the Nucleus Research Report errors in data entry, misapplied pay rules, and clerical errors average about 1.2% of total payroll costs. The same research report shows that .72% of company’s payroll is inflated due to inaccurate reporting of hours worked because of mistakes or ‘buddy punches’. So, let’s do the math, if you have 5 employees who earn $35,000 annually these errors are costing $3,360 per year. You should also be aware that the IRS requires payroll records be kept for four years and additional requirements can differ from state to state.
3.  Misclassified Employees- Many small businesses avoid the cost of payroll tax by classifying workers as independent contractors. According to the Department of Labor this is one of the most serious problems facing affected workers, employers, and the entire economy. Incorrect classifications can come back to bite in fines, penalties, and back taxes that the business owner will be liable for.
4.  Fringe Benefits- Reporting these items accurately often gets overlooked. Items like gift cards, prizes, awards, club dues, housing benefits, and company provided cars can be considered taxable wages and need to be reported as such. The Fringe Benefits, for purposes of income and tax reporting, can be a complicated issue. It is imperative that these benefits be reported correctly.
5.  1099s and W2s Issues – Form 1099 must generally be issued to vendors and independent contractors who provide more than $600 in services. If a company fails to timely furnish Form 1099 it can be subject to penalties. January 31st is the deadline to file W-2s and to distribute them to employees. Incorrect Social Security numbers and names are common mistakes made on W2s resulting in earnings not being properly credited.

The IRS penalizes about 1 in 3 businesses for payroll mistakes. The complexity of keeping up with everything you need to know to be compliant quickly adds up to a full time job. Employers are required to adhere to the numerous payroll laws the government regulates and employees can report employers that violate labor and wage laws to the Department of Labor. Even for a small business with a few employees, payroll handling is often outsourced to a company that has the expertise and support that is needed. If you have questions or concerns about payroll compliance, Kazdon offers a variance of payroll services that can be tailored to your specific needs, as well as resources and education.