Whether you’re new to payroll or a seasoned veteran, mistakes happen. Here’s a list of common payroll errors companies make.
Intentional or not, employers often classify workers as independent contractors instead of employees. Employers do not have to pay withholding tax for independent contractors. If and when an employer is discovered to be misclassifying workers, he or she is subject to paying those employment taxes, as well as back pay on withholdings. The IRS also levies fines on companies that mis-classify workers.
For helpful tips on determining who is an independent contractor and who is not, read more here.
Not Subjecting Vendor Payments to Backup Withholding
Issuing payments to vendors without obtaining a Form W-9 first can cause trouble. If and when a company does this, it's subject to mandatory backup withholding at a 28% rate. Even if it is later determined that vendor isn’t subject to that withholding, the company can still be audited for not first obtaining a Form W-9.
Not Issuing 1099s to Vendors
Any vendor, including independent contractors, must receive a Form 1099 if he or she makes more than $600 from his or her services. Not issuing these forms in a timely manner can lead to IRS penalties. These penalties range from $30 to $100 per form, which can add up quickly.
Miscalculating State Unemployment Tax
Not paying state unemployment tax can lead to a loss in a potential federal unemployment tax credit. Every state is different but generally speaking, to calculate what’s owed in state unemployment taxes an employer can multiply the wages of each employee by the correct state tax rate.
Not Including Gift Cards and Other Cash Equivalents in Employee Income
Employee prizes like gift cards and awards are necessary to report with income if they exceed a cash equivalent of $75 or more. For example, if an employee wins a $300 Visa gift card, that is enough to be reported with employee income. These are taxable wages, and never reporting items like this can result in some pressure from the IRS.
Not Depositing Withheld Taxes in a Timely Manner
Depending on certain circumstances, companies are required to deposit taxes on either a semi-monthly or monthly schedule. Not reporting based on these schedules results in late penalties and interest ranging from 2% - 15%.
Failure to Keep Payroll Records
Not keeping a record of documents - time sheets, copies of W-4s and W-2s, etc. - can trigger audits by the IRS. The general rule is to maintain these payroll copies for all employees for at least four years. Should an IRS agent come knocking and companies fail to provide them, those companies are subject to fines.
Not Running Payroll on Time
This issue is more common for small businesses. A problem they face is overpaying or underpaying employees because they’re strapped for time. Sometimes, these companies may forget to run payroll altogether, which can crumble trust within the business.