Top 7 Payroll Compliance Mistakes
With the potential for high fines, fees, and the time lost working to correct mistakes in the system, failing to comply with labor or tax laws can devastate a business. It takes a lot less effort to ensure that you’re payroll complaint now, so here are some of the most common mistakes you need to keep an eye out for.
Paying employees outside of payroll
No matter what, all payments to employees must go through payroll without exception. This counts for not just regular wages and salary, but also commission pay, any bonuses, and even gift cards that have any monetary value. They are all considered taxable wages, with the only notable exclusions being reimbursement for expenses entitled to the employee, so long as you have the relevant receipt.
Being late to file certain forms
All employers are required to report new hires to their state agencies within 10 to 20 days of the hire. Similarly, there are a series of payroll tax filing deadlines an employer must keep track of. These include Form 941 filings which are due on the last day of the month following the end of the quarter as well as year-end deadlines for W-2 distribution to employees, 1099s to your vendors, and filing 1096 and 1099 forms with the IRS. Ensure you understand your federal and state deadlines for all payroll forms.
Confusing pay period hours and work week hours when calculating overtime
Unless they are exempt, overtime rules apply on a 7-day period basis, regardless of when and how often you pay employees. If an employee on hourly pay works over 40 hours, they are owed overtime. This applies even if they work significantly less than 40 hours, or no hours at all, on the next week. It does not “balance” from week to week, regardless of what the pay period covers.
Misunderstanding overtime rules for salaried employees
Similarly, employers frequently misunderstand how overtime works in regards to employees on a set salary. This salary alone isn’t enough to exempt employees from having a right to overtime pay. There are specific requirements an employer must make in order to ensure that an employee is exempt from overtime, according to the Fair Labor Standards Act (FLSA) rules. These include a minimum weekly wage benchmark that the employee has to meet. Failure to comply fully with FLSA standards without overtime payments can lead to fines of up to $1,100 for every individual violation over a period of three years, with back-pay for the employee added on top of that.
Not classifying workers accurately
There are several separate classifications for workers, each of which has different tax rules which can lead employers to make serious mistakes with their payroll. Worker classifications include employees, statutory employees, statutory non-employees, and independent contractors. IRS Form SS-8 can help you determine a worker’s classification for tax purposes, but don’t neglect to withhold taxes or report wages and tax information until the IRS informs you of that classification. Otherwise, you may be required to pay further penalties after filing your taxes.
Mishandling employee records
Even a small business can quickly end up with a massive amount of records, each of them subject to their own payroll compliance requirements. It’s not uncommon that simple human error here leads to inadvertent violations. Payroll software can help you ensure that you are keeping stored all the records required. This includes keeping employee payroll records for at least three years after the last entry, employee records for four years after leaving the workplace, and records regarding employee leave for any business with over 50 workers. Individual state laws also apply, so ensure you research what requirements your filing system must meet.
Mistaking pre-tax and post-tax deductions
Pre-tax deductions exist to reduce the employer’s tax expenses as well as employee tax obligations. They are taken directly from an employer’s gross earnings instead of post-tax earnings. If an employer has an active Section 125 document, these include deductions related to the employee’s share of health, dental and vision premiums. Failing to renew an S125 document means it’s inactive, and the employer could be forced to pay for pre-tax deductions they weren’t entitled to. Furthermore, pre-tax deductions for employee elected deferrals towards an employer-sponsored Simple IRA or 401K plan. They do not apply to employee contributions to a non-sponsored IRA through their own payroll. Working with a payroll solutions team can ensure that any deductions are made to the appropriate earnings.
Any of the mistakes above can see you losing thousands to penalties as well as in lost labor hours. Working with payroll solutions like Wasatch Payroll can help to minimize your risk, but a business owner should always be aware of the potential danger.