Payroll is an essential part of every business; unfortunately for many small businesses without experience, the process is also full of pitfalls and risks. Here are some of the most common mistakes businesses make. If you think you might be making these mistakes or you’re not sure how to properly administer payroll, consider the help of a small business payroll tax expert.
1: Improperly Classifying Employees
If you’re confused about how to classify employees in a small business, you’re not alone. Unfortunately it’s also a place where many small businesses fall short, especially for businesses that don’t just have traditional full- or part-time employees.
In 2015, the Department of Labor found that as many as 75% of businesses had misclassified employees; the most common mistake made is to classify an employee as a 1099 contract worker when they should actually be an employee. The former must pay both the employee and employer portion of taxes, while the latter you withhold employee taxes from a paycheck and pay the employer portion.
Independent consultants (1099 contract employees) can offer a lot of flexibility and benefits, but it’s critical that you know the guidelines for when this applies to your employees. Whether you did it intentionally or unintentionally, when the IRS finds the mistake you are going to have to pay all the back taxes for both you and the employee, and will likely get hit with some hefty penalties and interest charges as well.
Avoid this mistake by consulting a payroll tax expert and classify your employees properly. If you’ve already made the mistake, voluntarily reporting it can reduce the penalties.
2: Withholding the Wrong Amounts
The amount of taxes that each person owes is unique to his or her situation and varies based on things like exemptions and number of dependents. It can also change from year to year as the IRS updates the tax code or when Congress passes legislation. As an employer you need to make sure you are withholding the right amount from an employee’s paycheck for income taxes, Social Security and Medicare, and that you are paying employer share for the latter. The most common mistakes people make in the process include:
- Incorrect deductions from employee salaries
- Failing to withhold all applicable state and federal taxes
- Withholding from employees that should be exempt
- Mishandling pre-and post-tax deductions
- Sending out W2s with mistakes
This is a mistake that can also lead to some expensive fines, and may also subject you to government audits in the future.
Check out part 2 on the blog next month for some additional mistakes that you may be making. If you don’t have someone who can keep up to date on all the tax laws and payroll requirements, you can hire a small business payroll consultant to provide you with the expertise to avoid these mistakes.