Running a business is hard work. It takes time, energy, money, and sacrifice in order to succeed in today’s competitive business environment. The last thing you want to do is make a costly payroll mistake. In fact, 40% of small businesses get fined every year to the tune of about $850, due to the improper filing and paying payroll taxes. Do not let your hard work and livelihood get siphoned off by the IRS due to some clerical mistakes.
Here are the most common payroll mistakes business owners make:
Not Paying Taxes Year Round
For many new business owners, its common to assume that business taxes work like personal income tax; meaning taxes get paid at the end of the year or during tax month.
However, this misconception can be costly to business owners. Businesses must pay taxes every payroll period. For example, if you pay your employees on a bi-weekly schedule, then you would also be responsible for paying your taxes on a bi-weekly schedule. The IRS and each state regulate the tax payment schedule, with payment schedules varying across state lines.
You can check out the payroll tax payment schedule by state here.
Another common mistake that business owners make is mismatching tax payments with employees pay schedules. For example, you pay half of your workers weekly and the other half bi-weekly. Business owners sometimes will pay taxes bi-weekly for everyone, which can cause some tax penalties. According to the IRS, you must pay payroll taxes according to the pay schedule of the employee. So for employees that were paid weekly, payroll tax must be paid weekly. Those that were paid bi-weekly, payroll taxes must be paid bi-weekly. Incorrectly paying taxes based on pay period is one of the best ways to get fined by the IRS.
Misclassifying Employees or Contractors
Everyone who works for you is an employee right? Wrong. Workers such as independent contractors, temp employees, and freelancers are not considered employees, but contractors. Businesses usually use contractors when they have a project or specific problem that needs to be fixed. Once complete, the contractor can take his labor elsewhere.
Contractors are treated differently in terms of payroll than traditional employees. Employees require a W-2 whereas contractors need a 1099 when reporting wages to the IRS. 1099 workers are also not entitled to any benefits as well.
Misclassifying your worker can cost you. Employees typically cost 25-30% more than contractors, meaning if you misclassify a contractor as an employee, you could be eating that cost. On the other hand, about 30% of employees are misclassified as contractors meaning your underpaying in payroll taxes and are subject to fines. The Department of Labor (DOL) is increasing auditing on employers who are misclassifying employees as contractors.
What gets tracked gets accounted for. Good reporting can help manage your business or help you avoid fines. As a business owner, you are legally obligated to keep certain payroll documents on file.
Form I-9: Each employee needs to fill out an I-9 Form to verify that he or she is working in the U.S. legally. You don’t have to submit the form, but you must keep it on file. You must maintain this file for the entirety of the employee’s employment, and either 3 years from the hire date or 1 year from the term date, whichever is longer.
W-4 Form: Your employee will need to fill out a W-4 Form to determine their tax withholding. Keep in mind that you cannot do this on their behalf, your employee with need to fill it out themselves. Each business is legally required to keep every employee’s W-4 pm file for at least 4 years.
New Hire Report for States: Each state has a department to report new hires. Depending on the state, you’ll have at most 90 days to submit your employee’s information to the state. Please keep in mind that each state is different.
What can be Done?
Many business owners feel overwhelmed with the challenges that come with running payroll. Luckily, there are organizations called Professionally Employer Organizations (PEOs) that can take over all your back office needs so that you can focus on running your business smoothly. PEOs are experts at all things payroll and can assist with any issues you are facing. PEOs ensure that all outgoing payrolls have accurate time data, are going out in a timely manner, and that all employee classifications are correct.
Partnering with a PEO like CornerstonePEO may be in your best interest. CornerstonePEO covers everything from HR and employee benefits to payroll and workers comp. Our industry leading PEO services offer innovative, cost effective, easy to understand business solutions for companies of any size and industry. Contact us to learn more.