Your business is up and running, you’ve hired a few employees, and clients are beginning to roll in. Now, there’s one big question left – how will you handle compensation? Before your employees can start putting hours into your company, you need to have a solid payroll system in place.
Payroll is often seen as a complex process. It involves filing government-mandated forms, paying taxes, and most importantly, making sure your employees get the compensation they’re entitled to. With so many factors to consider, paying attention to detail is essential to preventing mistakes. Here’s a list of 5 of the costliest payroll mistakes and how to avoid them:
Incorrectly processing wage garnishments
As part of your business’ payroll, you may have to deduct money your employee owes to a third party. Wage garnishments, levies, and child support orders can be difficult to implement, especially if employees have multiple wage garnishment orders. Businesses of all sizes struggle with processing wage garnishments correctly. There are rules for withholding, how much an employee is allowed to retain and which of multiple claims gets paid first. As a business owner, you’re responsible for tracking each employee’s wage garnishments to ensure that you withhold the deductions correctly. The IRS website is a good starting point for learning about processing wage garnishments in payroll.
Messing up the W-2 form
The W-2 is the most commonly filed tax form, and in turn, it also suffers from the most frequent errors. It’s important that you get a W-2 form to every employee by January 31st of any given year. The W-2 should list their total wages and deductions for the prior year. You’ll also need to file the W-2 with government agencies by their required deadlines.
One of the most common mistakes that businesses make on W-2 forms is mismatching names and Social Security numbers, resulting in earnings not being properly credited to employees. This also causes problems with an employee’s benefit record at the Social Security Administration and may reduce his or her benefits in the future. Incorrect Social Security numbers can also result in a $100 fine for each incorrect form.
Improper overtime payments
Everyone knows that hourly employees get time-and-a-half after 40 hours of work a week. Right? Well, not always. Employees must be paid according to all the other mandates of the Labor Department and the state in which they reside. A common mistake among small business owners is to grant compensatory overtime or “comp time” (time off) instead of paying overtime as legally required. In most situations, this is illegal. Overtime is not always calculated at 1.5 times the employee’s hourly rate. Make sure you’re following your state’s Wage and Hour regulations if they’re more generous than the federal rules.
Not keeping proper records and backups
Requirements vary from state to state, but records such as time sheets, cancelled checks and W-4 forms need to be held anywhere from four to six years. Additionally, it’s important that you keep proper backups of all of your payroll documents in case the person responsible for your payroll is away or sick. Even if the person responsible for your payroll isn’t available, the IRS and the state will still need to receive payments on time, as do your employees waiting for their checks. There always needs to be more than one person capable of understanding and handling your business’ payroll functions.
Thinking “none of this applies to me”
The most dangerous payroll mistake of all is thinking that none of this applies to you or your business. Thinking your business is too small to comply with all of the rules is a dangerous mindset to be in. At first glance, the rules may not seem to apply to you, but it’s important to understand that they do. Remember that no matter who does your payroll, reporting and compliance are ultimately your responsibility.
Payroll mistakes are common among small business owners, and they can cost your business more than you think. Failure to process payroll accurately or on time can lead to government penalties, excess fees and upset employees. To avoid these common mistakes, it’s important that you stay on top of things and to educate yourself on payroll best practices.