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If you accidentally underpay an employee, you’ll undoubtedly hear about it. But if you slip and overpay your employees, you may not know for weeks or months. As a business owner, it’s up to you to manage payroll with the same precision you afford to every other part of your business.
Here are some of the most common payroll errors and how to avoid them.
The Fair Labor Standards Act (FLSA) requires that non-exempt employees earn overtime when they work more than a standard workweek, usually 40 hours. States further specify what constitutes overtime. The standard overtime rate is time and a half.
For example, non-exempt employees in California earn overtime pay on hours worked past eight hours in one workday. So if your hourly employee works a 10-hour shift, you’re required to pay overtime for the final two hours of work, regardless of whether the employee worked more than 40 hours during the workweek.
Make sure you’re aware of overtime laws in your area. If you fail to pay overtime and refuse to correct it in a timely manner, you face a Department of Labor fine of up to $2,074. Your state may also tack on a penalty.
As an employer, you’re responsible for holding onto a portion of employees’ gross pay for taxes. If you incorrectly calculate gross pay, your payroll taxes will also be off.
Getting payroll taxes wrong can happen for three reasons:
For example, let’s say you didn’t pay employees at their overtime rate when you should have. Because you calculated payroll taxes based on the wrong gross wages amount, payroll taxes are also wrong.
You also might not be aware of all the payroll taxes that apply to employee earnings. If your business hasn’t paid an employee more than $200,000 before, you might be unaware that you’re required to withhold 0.9% in additional Medicare taxes after reaching $200,000 in earnings for the year.
You can avoid some payroll tax miscalculations with payroll software, which calculates payroll taxes automatically. Talk to an accountant about correcting payroll tax errors.
Every time you process payroll, your payroll software sends off federal, state, and local payroll taxes to the appropriate authorities. It also files a quarterly Form 941 to reconcile the amount of federal taxes you’ve deposited with the amount you owe to make sure you haven’t overpaid or underpaid.
When you don’t remit payroll taxes or file a Form 941 on time, you face harsh penalties outlined on page 21 of the IRS federal tax deposits handbook. It’s always worth double-checking your payroll portal for snafus in filing and remitting payroll taxes.
You can run into serious trouble for misclassifying a worker as an independent contractor. Many small business owners unknowingly compensate workers as if they’re contractors despite treating them like employees. When you make this payroll mistake, get in touch with a CPA to remedy it as soon as possible.
In virtually all cases, businesses pay independent contractors without withholding taxes. However, employers must retain a portion of employee compensation for payroll taxes and buck up for employer-paid taxes, including unemployment taxes and one-half of FICA taxes (from the Federal Insurance Contributions Act), which help to fund Social Security and Medicare.
The difference between employees and contractors comes down to three things:
The line between employees and independent contractors can get blurry, so meet with a CPA to set boundaries in your workplace that distinguish between the two groups of workers.
It’s 6 a.m., and your employee Chris is just waking up so he can get to work on time. It’s payday, and he can’t wait to check his phone for a deposit notification. He opens his email inbox and finds just a few ads but no payday email. Before Chris has wiped the crusties out of his eyes, you’ve already let him down.
Paying late consistently can land you in hot water with your employees and the government. Paying employees late not only lowers morale but also risks FLSA labor law infringement.
Most online payroll solutions will remind you to run payroll a few days before payday so that paychecks reach workers’ bank accounts on time.
Bookkeeping creates your business’s financial paper trail. In the unlikely event of an IRS audit, you’ll need to back up every reported revenue and deduction with documentation.
Governments set payroll recordkeeping requirements. Check out our guide to payroll records for a breakdown.
Fringe benefits are the perks that businesses offer as part of employee compensation packages. Subsidized health insurance plans, gym memberships, and commuter benefits are just some of the extras that small businesses extend to employees.
Most fringe benefits are taxable compensation to employees. You’re committing a payroll error when you fail to include taxable fringe benefits in employee gross pay.
However, not all fringe benefits are subject to all payroll taxes. For example, employer health insurance plan contributions are exempt from federal and payroll taxes.
An accounting professional can help you decipher how payroll works and which fringe benefits create payroll liabilities.
Take preventive steps to identify and rectify payroll errors before employees or tax authorities are asking you questions.
The best way to catch errors is to complete a payroll reconciliation after every payroll run. If you catch a mistake, talk to your accountant to figure out the correct next step.
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