Payroll Compliance: Common Payroll Mistakes to Avoid
Payroll compliance isn’t the most exciting topic in the world, which may be one of the reasons why various small businesses don’t know a great deal about it. However, ignorance can severely damage your business, and according to reports, as many as 1 in 3 businesses are penalized as a result of payroll compliance failures. Knowing how to file before deadlines and keep track of tax payments and forms can be a lot of hard work, but failing to provide the right information when asked for it can cause significant issues for the future of your business. This may result in huge fines, or even the demise of your company. The following are some common mistakes that people make when it comes to dealing with payroll.
1. New Hire Reporting
Small businesses often avoid hiring extra help as often as possible, which is one of the reasons why the New Hire Reporting is easy to overlook. Remember that it’s due to your State within a number of days of the hire date of your new employee, and some payroll companies will file it for you – while others will not.
2.Forms W-4 and I-9
Every new employee who is hired to work in the U.S must complete an Employment Eligibility Verification document (Form I-9). This form verifies that the employer has determined the employment eligibility and identification offered by each employee. What’s more, workers in the U.S. must also pay income tax, which means filling a W-4 form. The W-4 form will help the employer calculate how much income tax to withhold from an employees paycheck.
When your business has employees, you will need worker’s compensation. Even if you’re an experienced employer, it’s possible for holes to appear in your workers’ compensation coverage. It is important to meet with an insurance professional to ensure you have the proper coverage for your business.
4.State and Federal Posters
There are federal and state notices that must be posted in a location where all employees are able to read them. Numerous states are particularly liberal about issuing fines for employers that do not post those notices on workplace walls.
5.Depositing payroll taxes
An employer must deposit federal income tax withheld and both the employee and employer social security and medicare taxes. The employer must use EFTPS to make the federal payroll tax deposit. It is important for the employer to know when they are required to make the tax deposit, whether it be semi-weekly, monthly or quarterly. Failing to make the federal tax deposit on time could result in penalties and interest.
6.Employee or Independent Contractor?
The workers you hire will be defined as either independent contractors or employees, and getting the classification right is crucial. Depending on your classification, will determine how the individual is compensated. The IRS has 20 factors that an employer can use to determine if an individual is an employee or subcontractor. The 20 factors fall into three categories: Behavioral Control, Financial Control and Relationship of the worker.
Following the achievement of a target, or a huge annual holiday, it’s common practice for numerous businesses to pay out bonuses to their staff. However, these bonuses are generally given separately from the payroll, and to ensure accountability, you will need to incorporate bonuses into the payroll to make sure that everything is properly documented.
The decision of whether expense reimbursements can be excluded from the wages of an employee will depend on whether that employee is reimbursed according to an accountable plan, wherein expenses are reimbursed only through a business connection. Any excess reimbursements that are not relevant to the business will be returned to the employer. If expenses are reimbursed under a plan or policy that doesn’t meet the above requirements, they will need to be included under taxable wages.
9.Garnishments, Deductions, Retirement Plans, and Health Insurance
The government has decided that the best way that they can collect court-determined debts in certain circumstances was to approach the source of a person’s money – their employer- and collect it directly from that person’s salary. Employers are required by state and federal law to make deductions from their employees’ wages to pay authorities for certain debts that the employee has failed to pay. Involuntary deductions can include child support and bankruptcy orders. Usually, when this happens, the employer uses a wage garnishment order that allows them to deduct additional tax amounts from an employee’s paycheck. On the other hand, employers may also withhold amounts from a worker’s wage to pay for things like retirement plans that the worker has opted into, or certain types of health insurance. Voluntary deductions, such as these, require employers to be familiar with the various state and federal laws that apply to them.