If you’re still handling payroll in-house like more than 60 percent of U.S. businesses (according a 2013 National Business Association survey), you’ve likely rolled your eyes at least once over all the regulatory hoops.
Navigating the Department of Labor circus can make you feel like less than a crowd pleaser. But the show must go on.
Your tightrope act? Avoiding government penalties without overpaying employees. That said, here’s a review of eight common mistakes small businesses make in their payroll processing.
- Misidentifying whether a worker is an employee or independent contractor affects everything from benefits to tax withholding. It can lead to wage and hour audits, significant penalties and/or lawsuits, notes Don McLoughlin in the Journal of Accountancy.
- Failing to file Form W-9s for paid vendors could lead to mandatory backup withholding (at a 28 percent rate) or other penalties, says Brian Cumberland in Accounting Today. Similarly, Form 1099s must be issued to vendors providing more than $600 in annual services.
- Not installing advanced employee tracking software can divert valuable time and brainpower from your payroll department. Buddy Punch automatically gathers data that would otherwise be manually compiled, notifying payroll about employee schedule requests, actual hours worked and pay period intervals.
- Employers frequently incorrectly processing wage garnishments related to levies and child support orders, The Department of Labor reports.
- Omitting the fair market value of gift cards, prizes and awards as employee income is problematic, Cumberland notes, since they’re subject to federal income and employment tax withholding.
- Companies failing to deposit taxes monthly or semi-weekly may be subject to late deposit penalties (from 2 to 15 percent) with interest, Cumberland says.
- Employee expenses may not be deducted from taxable wages unless they’re working under a so-called “accountable plan,” explains Barbara Weltman on Paychex.com.
- Most employee travel and commuting expenses are not taxable income, Cumberland notes. But employers often misunderstand how to valuate fringe benefits, including company-provided automobiles and housing benefits.
As they say in show biz, break a leg on your next payroll.