Common Payroll Mistakes Small Businesses Make

Payroll Mistakes Can Cost Your Business

Studies indicate that each year about 40 percent of small businesses incur more than $800 in fines due to payroll mistakes.

If your firm manages payroll in-house, take care in setting and maintaining your payroll system. When you or your payroll admin make a mistake in the payroll process, it can cost you penalties, interest and unhappy staff.

Here are some of the more common payroll mistakes.

1. Payroll not setup correctly.
If you make a mistake in setting your payroll system and/or individual employees in the system, the problems can escalate over time. As the issues grow, your penalties can grow as well.

Make sure you carefully review how you setup your federal, state and local tax withholdings.

When you hire a new employee, double check the social security number, employee name and personal withholding amounts.

2. Not Updating Your State Unemployment Insurance Rate.
This is a very common mistake. SUI can change every year. Several months before the new year, the state will send you the SUI rate for the coming year.

Pay particular attention to your state’s unemployment insurance (SUI) rate at the beginning of the year. In Virginia, you can sign-on to the employer’s tax system and see your current rate.

If you use last year’s rate all year, you can be underpaying the state. Underpayments can incur penalties.

3. Making Deposits Late
When you deduct taxes from employees, you are acting as the government’s fiduciary. Never treat withheld payroll taxes as funds you can spend for business.

If you do not pay payroll withholdings and your company’s payroll taxes on time, the penalties and interest can add up very quickly. In serious situations, criminal penalties are possible.

If you use QuickBooks payroll, the system does flag payroll tax due dates. Watch those dates carefully.

4. Incorrectly Excluding Reimbursements from Wage Reports
To properly exclude employee expense reimbursements from wages, you must have an accountable plan, which specifies that your firm only reimburses employees for business expenses. Under this plan, employees must return to the company any excess payments (for non-business related expenses).

If you reimburse employees and do not adhere to an accountable plan, you must include the payments for expenses as taxable wages.

5. Not Properly Valuing Fringe Benefits
Fringe benefit valuations can be complicated. Fringe benefits can include providing employees with a company car, a club membership or paying for spousal travel. You should determine the value of these benefits and properly report them for withholding purposes.

If you have any questions about the tax implications of your employee fringe benefits, please contact us.

6. Not Properly Including the Value of Awards and Bonuses
The IRS views most prizes cash, gift cards and material goods as benefits subject to withholding. Very low-value items can be excluded from wages (company logo pens and T-shirts for example).

Just remember that the IRS never views cash payments as a low-value item. If you pay any monetary bonus to employees, you must include those payments in your payroll withholding and reporting calculations.

7. Not Paying Employees on a Proper Schedule
Most states have a minimum pay period. While you can pay more frequently than the minimum, you cannot pay less. Your pay period can be weekly, bi-weekly, or monthly.

The period you chose will have an impact on your cash flow. If you need help determining your ideal pay schedule (or do not know your state’s minimum pay period), please contact us.

We support employers in Maryland, Virginia and Washington, DC.

8. Not Getting a w-9 From Vendors
You must have a w-9 from each vendor you pay. If you pay a vendor without getting a w-9 form from the vendor, the IRS can charge you a 28 percent withholding rate.

Even if the vendor is a corporation and not subject to withholding, you can incur issues if you do not get a w-9 in advance of paying the vendor. Request a w-9 anytime you set-up a new vendor.

9. Not Posting Work Place Posters
As an employer, you are required to display several posters prominently in your workplace. Here is a listing of several required posters .

Even if you hire employees to work from their homes, you are required to send a physical link to the posters to them or to send physical copies of required posters.

Your state may also require that you display certain posters. So, check with your state’s employment regulation office.

10. Improperly Classifying Employees as 1099-Contractors
For more information in this topic visit our full post on 1099 Contractors vs Employees.

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