As a small to mid-sized business owner, you probably don’t know a whole lot about your payroll and are hoping some sort of automation tool is taking care of all payroll errors. You may be an expert in your field, good, or service but not when it comes to calculating payroll compensation and taxes. You probably don’t have any formal training or a degree in bookkeeping, accounting, or finance. Having some payroll know how can make the process simpler, but there are common practices you need to know in order to not commit any of these 5 payroll errors.
1. Employees Classified as Independent Contractors
Workers generally fall into the category of employee or independent contractor (at times called self employed or freelancers). It is essential to get this classification right because they will also be filing taxers on the work they do for you that must match what you send to the IRS. It basically boils down to whether they are filling out a Form W-2 or Form 1099. A big difference between the two is that the full or part time employee using a W-2 can receive benefits like health insurance, retirement plans, and more. If you improperly classify, the IRS will find out and can come at you with fines, penalties, and even jail time.
2. Human Payroll Errors
Forgetting to carry the one is more common than most would think. Whether using an electronic calculator, punch system, spreadsheet, or other, the data you or your staff inputs must be correct. Payroll errors in calculations are inevitable with traditional methods and when there is only one person or system in place to check it. The American Payroll Association even shows data with a rate of errors from 1% and 8% of total payroll in companies that use traditional timecards. This is why it is important to have double checks and fail safes in place for each transaction.
3. Subjecting Vendor Payments to Backup Withholding
When a business issues a payment to a vendor without obtaining a Form W-9 first, this payment could be eligible for mandatory backup withholding at a rate up to 28%. Even if the vendor is not subject to backup withholding later, the business must still get a Form W-9 prior to making a payment, because in an audit there is a collection of a failure-to-deposit penalty.
4. No Overtime for Salaried Employees
Remember when the guy from “Office Space” was asked to come in to work on Saturday and Sunday? The act by the employer was probably perfectly legal, even if the boss man didn’t shell out time and a half. The status of the employee will show them as exempt or non-exempt from overtime. A few examples of employee categories that are exempt from overtime include: computer technicians, outside salespeople, administrators, executives, and workers who earn over $100,000. Each of these exemptions have their own rules and standards, so visit the Wage and Hour Division of the Department of Labor or a professional before making the categorization that an employee is ineligible for overtime.
5. Forgetting to Add Fair Market Value of Prizes, Gift Cards, and Awards in Employee Income
As part of federal income tax laws, most of these awards are considered taxable benefits that are subject to federal (and possibly state) income and employment tax withholding. Gift cards should be counted as the equivalent of their cash value and should be included in taxable wages even if they are for a small amount. There are certain exceptions from this kind of tax if they are considered “de minimis in nature.”
Payroll Errors in Houston
And if you are in need of expert payroll services in Houston or the surrounding area to keep you from making these errors, please contact us.