In a perfect world, running payroll would be as simple as hitting a button and watching a series of perfect checks roll off the printer. However, any business owner who has ever played a role in generating payroll will tell you that the process is NEVER quite that easy.
Between tracking down time cards, ensuring time is logged correctly and needing to have a strong baseline knowledge of federal, state, and local laws regarding pay practices, the art of running payroll is rife with potential for errors, some of which have serious consequences.
Below, we outline the five most common mistakes that small businesses make when running their payroll and some sneaky tips and tricks to make running payroll easier moving forward.
Classification mistakes are the top error, simply because it is the trickiest to avoid. These days, businesses have growing numbers of consultants, contractors, and other temporary staff that – either by the number of hours they work or the type of tasks that they perform – are a challenge to classify. However, failure to really nail down what classification these workers are can land you in serious trouble come tax time. Your first step should be to check in with the IRS for their complete run-down of who should be in which bucket (click here for the link), but if you’re still unsure, reach out to an outside vendor such as a Professional Employer Organization or a certified accountant for additional guidance.
Whatever system you have for managing data, be it paper-based or automated, but it needs to be a system that works for you and it needs to have safeguards to ensure that the data it is capturing is accurate. According to those in the know, errors in employee information are viewed as particularly egregious and can land you in serious hot water with the feds (especially if you’ve somehow offered employment to someone who isn’t eligible!). With this in mind, ensure that you have the full name of your employees and that it matches their social security number; that you have their correct data of birth and current address; that employment start and finish dates are recorded properly; and that your payroll details, including hourly wages, gross wages, and withholding details, are all correct. A centralized Human Resources Information System can be completely customized with names, titles, salary histories, performance reviews, company policies and handbooks, benefits administration, training records, disciplinary records, employee attendance, PTO usage and more.
No longer is the concept of overtime a throw-away term whereby you’ll toss your workers who go “above and beyond” a few extra dollars for their extra hours. Indeed, overtime pay is regulated by the Fair Labor and Standards Act (FLSA) and is designated as time and a half (1.5 times the employees’ regular rate of pay), for any time worked beyond 40 hours in a workweek. Now, this may differ depending on your state and city (so be sure to check here), but failure to calculate – and pay out – the correct overtime rate may mean that you’ll have to pay out back wages, penalties, and interest to anyone that challenges you.
Tax Rate Trickery
The fun thing about taxes is that they change fairly frequently and often with little notice. With this in mind, it’s up to you to stay abreast of tax changes to ensure that you are paying the appropriate tax rate or else find yourself susceptible to paying back taxes, penalties, and even interest! For this year in particular, you should note that the corporate tax rate has undergone a fairly significant reform this year, but you’ll also want to check rates for the following taxes, which typically update annually: federal income tax, federal unemployment tax, social security tax, Medicare tax, state income tax, state unemployment tax, and local income tax.
Whether it’s forgetting to mail out the 1099 to that one contractor who cleared just over $600 (the threshold) in earnings for your company or totally dropping the ball on reporting your federal, state or local income tax to the relevant authorities, missing a deadline IS a big deal and you will incur penalties (the baseline for the IRS is a 15-percent failure to deposit fee, not including associated fines!) To avoid these errors, mark hard deadlines in your calendar for when the various documents are due, as well as various reminders at appropriate intervals to prompt you to remember to handle various aspects of the filing so that it doesn’t all pile on at once and make it impossible to get the filing in on time.
Distilling all the possible payroll errors down to five makes this list far from comprehensive, but we hope that in providing this information that you will be able to look critically at your own payroll process and set yourself up for a simplified, penalty-free 2019.
Overwhelmed? Human resource professionals can assist with every step of payroll from timekeeping to taxes. Ask us how or call us at 800-400-1968.