A smooth-running payroll system is vital to the success of any small business. Many business owners who elect to run payroll in-house don’t consider all of the difficulties associated with payroll processing. Staff payment problems can lead to low morale, poor productivity and even a government audit. Mistakes can cost you thousands of dollars in IRS penalties and hours of time correcting it. Payroll errors are common and costly. Here are the top five mistakes that small businesses make on their payroll:
Setting up Payroll Incorrectly
The biggest mistake that small businesses make is setting up payroll incorrectly. You can calculate wages perfectly and get payroll done on time for each pay period, but if you didn’t register your business, set up federal, state and local tax withholdings or classify employees correctly, your payroll will be incorrect. In order to file the proper amount of taxes, you’ll need to study the law and understand how much will be withheld from employees. Plus, it’s important to understand how much you, as an employer, will pay in taxes.
Workers are generally classified as either employees or independent contractors. Getting this classification correct is a big deal. Depending on the classification, how compensation gets reported to the IRS is different (Form W-2 vs. Form 1099). Misclassifying an employee as an independent contractor will eliminate certain taxes, but the mistake is serious, and you may be held liable for employment taxes for that worker. The main factor in determining how you classify workers is the degree of control the business has over the worker. The more control a business has over the worker, the more likely it is that the worker is an employee rather than an independent contractor.
Missing Tax Deposit and Filing Deadlines
There are serious penalties for missing the deadlines for depositing your payroll taxes and filing the required reports. It’s important to keep in mind the deadlines for federal, state and local tax deposits and tax filing deadlines for the entire year. Make sure to report the earnings and withholdings for each employee, total withholdings amounts and payments to contract workers.
Not Displaying Wage Posters
Wage posters are not just for factories anymore. The federal government takes its requirement very seriously that you display the posters publicizing the federal minimum wage and overtime pay standards. Even if your small office, it’s important that these posters are displayed somewhere that all employees have access to.
Breaches in Confidentiality
Large companies have full-time professionals using automated systems that have high levels of security. Smaller businesses that do payroll themselves may not have the same systems in place. Make sure to design your payroll system with complete confidentiality in mind. Remember: no one talks about their salary in public, therefore no one should find out someone else’s salary in private.
The most dangerous mistake of all is claiming ignorance. Whether you do payroll yourself or use an outside service, reporting and paying all payroll taxes correctly is your responsibility.