Baker’s Dozen of Common Payroll Errors

Everyone makes mistakes, but on payroll it seems like a lot of mistakes can be made. Below is a list of 13 of the most common payroll mistakes I’ve seen and I’ve compiled them into one list. I hope you find them useful and can help you improve your own payroll system for your business!

First, don’t make a backup of your system. Since the person managing his payroll is probably a human being, you can be sure that he won’t be able to work every day. Make sure you have some means of continuing to operate your payroll program without them. You should also have a manual means of recording payroll in the event of a technological malfunction.

Second, failure to issue a 1099. When hiring a vendor or independent contractor, it’s important to remember that if you pay them more than $600 for their services, they have to file a 1099. Severe penalties are subject to anyone who Please do not provide this form as it is an integral part of your outside employment and tax records.

Next, misclassification of employees. Making sure your employees are correctly classified is imperative to not only keeping good tax records, but different types of employees are subject to different pay and/or benefit packages. Be sure to comply with all state and federal laws regarding how your employees are classified and structured within your company.

Mislabeled freelance contract workers is another mistake. Labeling all of your employees as freelancers is not a good way to avoid giving them compensation. The IRS also keeps a close eye on employment status, and mislabeling employees is a good way to get audited and can greatly affect your worker’s income taxes and tax withholding.

Choose Exempt or Non-exempt. Employees classified as exempt are not required to accrue overtime. Simply putting an employee on pay does NOT exempt them from overtime. Classifying an employee’s status requires him to be familiar with federal and state laws, and it can be different for different jobs.

Excluding travel and displacement expenses of employees. As a general rule, accrued travel and travel expenses are not considered taxable income for a subordinate. However, if such employee travels to a place of employment that is not at the employee’s permanent residence, your travel and commuting benefits must be provided.

Miscalculating unemployment for state taxes is a very common mistake. Being late or miscalculating your state unemployment taxes can cost your business your unemployment tax credit, which can be as much as 5.4%. You may also face a lawsuit if employees who have been laid off are not notified of their unemployment benefits.

Incorrectly recording overtime can be fatal. There are state and federal regulations regarding overtime pay. It is not limited to 1.5 times the employee’s hourly wage and may include even more calculations to be accurate.

Security for employee paychecks against scammers. Technology has helped companies large and small to be more self-sufficient and have more advanced tools for their activities. This same technology is also used to trick you in some situations. Check fraud is a very real occurrence, and you should make sure your business is protected by watermarking or any other type of paper security method. Due to this fact, more companies are paying their employees via direct deposit, which bypasses the paper fraud method altogether.

Mishandling employee wage debt can be crippling. It is vital to withhold any type of wage garnishment, tax lien, child support, or any other court-ordered paycheck withdrawal. Be sure to confirm with the ordering state that you are deducting the employee’s check correctly.

Failure to record and subpar data acquisition are deadly to your business. Nearly 2% of all total payroll costs are due to record keeping errors. The Internal Revenue Service requires that you keep at least four years of records, and some states require even longer.

Don’t forget not to correctly record taxable items. Federal tax laws require you to consider prizes and fringe benefits subject to income and employment tax withholding. Gift cards are considered cash and should never be excluded from taxable wages.

And finally, missing tax schedules: Depending on how late a business files its taxes, it may be subject to late deposit penalties and interest rates. Depending on how late the tax payments are, the range can be anywhere from 2% up to 20%

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