Top 3 Mistakes to Avoid in Payroll Practices
While making mistakes might be a part of life, payroll mistakes are not so easily forgiven or forgotten. Pay can be a complicated issue and one that is constantly changing. For this reason, staying abreast of the procedures and rules is absolutely crucial to the success of any business, whether large or small.
As a business owner, it can seem like your list of duties is never-ending, but while that may be true, the last thing you want to fall by the wayside is your pay system. Your employees depend upon reliable system and your reputation does as well. While this may seem like an enormous amount of pressure, don’t let yourself become intimidated. Instead, buckle down and take advantage of the numerous resources available. Doing so will keep you ahead of the game and make sure that you establish the proper practices.
With that in mind, having a working knowledge of the most common payroll errors and knowing how to avoid them can be invaluable. While the potential errors to be made can be significant, the following are the top three problems many companies face:
#1 Misclassification of Employees
The misclassification of employees is a common issue that’s been experienced, especially since the introduction of the ACA, or Affordable Care Act. This is largely due to the penalties that the ACA imposed for not providing the necessary coverage to employees. What this means is that both federal and state agencies are paying closer attention than before to proper employee classification.
You may be surprised to learn that the Department of Labor in 2015 showed that as many as 75 percent of U.S. employers were not classifying workers appropriately. With the increase use of consultants, freelancers, part-timers, and contractors, and the decrease in full-time workers, it has become increasingly difficult for employers to make sure they are classifying workers appropriately.
So what exactly does “misclassification” mean? This refers to the labeling of workers as contractors instead of employees. For some businesses, this “mistake” has been an intentional way to avoid paying taxes and benefits. However, for all of those businesses that do it on purpose, there are many more that do it by accident simply because they are not aware of the many changes being made in tax and labor laws.
The penalties for not properly classifying your employees can be significant and consist primarily of hefty fines that can include you and your employee’s share of taxes as well as interest and penalty charges. Not only this, but misclassification will deprive deserving workers of important benefits, such as unemployment, overtime, and health insurance.
To avoid having to face these kinds of penalties, the first order of business is to make sure you’re well aware of the guidelines that have been posted by the IRS, or Internal Revenue Service. If you have any questions at all, don’t hesitate to consult a tax expert. If you’re one of the many businesses that utilizes a payroll service, connect with them and see what resources they have available. If you don’t, consider working with one that provides tax compliance services.
Finally, if you’ve discovered that you’ve made a mistake, don’t try to hide it. Contact the IRS immediately as the results will be significantly better than if they simply find out. In fact, the IRS offers partial relief for employers who correctly reclassify employees, contractors, etc.
#2 Withholding Errors
Both employees and employers are responsible for taxes. In the majority of cases, the employer is going to be responsible for withholding the taxes on the employee’s behalf.
With that in mind, it’s important to note that taxes can be complicated. There are unfortunately many opportunities for an error to occur during the process of withholding. In order to avoid these errors, it’s essential for businesses to determine (1) how much in taxes needs to be paid and (2) how much needs to be withheld from the paychecks.
These types of issues are a big ticket item with the IRS, and its actually one of the biggest sources of revenue for the government. While the first mistake mentioned, misclassification, is a big cause for withholding errors, it’s certainly not the only cause. It’s all too common for businesses to rely on human resources to determine tax issues, but without the proper knowledge, these departments can facilitate a number of errors from withholding failures, incorrect W-2 forms, incorrect deductions, etc.
Like misclassification, one of the biggest consequences of failing to abide by the appropriate withholding guidelines is a hefty government fine. But not only this, you could also end up in a never-ending stream of audits as well as records that are a complete mess.
To ensure that this headache won’t happen to you, you need to make sure you’re familiar with all applicable federal and state laws or hire a payroll service company. As in the case of misclassification, if this mistake has been made, notify the proper agencies immediately as the sooner you make the changes, the less costly it will be.
#3 Keeping Poor or Inaccurate Records
It’s all too common for businesses to be careless with their records, whether it’s data entry mistakes or placing incorrect names and social security numbers where they don’t belong. These might seem small and seemingly insignificant, but they can cost thousands and even millions every year in addition to hefty penalties.
Switching up social security numbers is so common, in fact, that the SSA now offers a verification phone number so that employees can confirm the numbers their employer has on file.
Improper records can significantly delay tax filings and can result in them not being done correctly at all. Both of these situations can result in big time fines and penalties. Remember, all records related to pay must remain on file for a period of three years in case of audit.
Keeping accurate records doesn’t have to be a huge headache. Having an efficient filing system and checking your records on a routine basis can make all the difference and can save enormous amounts of money over time.