Mistakes often are chalked up to human frailty, but those affecting your company’s payroll aren’t so easily dismissed.
Failure to comply with payroll laws can cause increased scrutiny from government agencies, penalties, fines and – in extreme cases – imprisonment. Employee goodwill also could be lost, as workers quickly tend to become disillusioned by payroll mistakes.
Here are the five biggest mistakes employers make when processing payroll and how you can avoid them:
- Misclassification of Employees as Independent Contractors
Misclassifying employees as independent contractors leads to the employer avoiding its share of taxes and the employee’s portion not being withheld. The misclassified employee also loses out on vital benefits and protections, such as employer-sponsored health insurance, overtime and unemployment compensation.
Generally, if you control what type of work will be done and how it will be done by the worker, then the worker is an employee, not an independent contractor. But, determination isn’t always so simple, as there are other variables to consider, such as the type of relationship you have with the worker and how he or she is paid.
- Improper Classification of Nonexempt Employees
Nonexempt employees are entitled to overtime, but exempt workers are not. Therefore, when you misclassify nonexempt employees as exempt, they don’t get overtime pay, no matter how many hours they work per week. This practice can lead to a wage-and-hour lawsuit.
Example: A 2015 Department of Labor press release states that a Fargo-based hotel owner was ordered to pay more than $180,000 to 200 current and former employees because he failed to pay them overtime and misclassified some workers as exempt salaried.
Typically, an employee must perform specific job duties and receive an annual salary in excess of a specific amount to qualify as exempt. The rules are intricate, so consider using an HR management tool, if necessary.
- Withholding Blunders
Paycheck deductions can be mandatory or voluntary, making the withholding process a multi – faceted one with vast potential for slip-ups. The most common mistakes include:
- failure to withhold federal and state taxes;
- improperly setting up the employee’s tax information;
- inaccurate calculation of pretax and post-tax deductions, such as cafeteria plan premiums and wage garnishments;
- making incorrect deductions from exempt employees’ salaries;
- excluding taxable fringe benefits – such as gift cards and certain awards and prizes – from the employee’s income;
- excluding specific expense reimbursements from the employee’s taxable wages;
- providing employees with a Form 1099-MISC instead of a W-2; and
- issuing incorrect W-2s.
- Late Tax Payments and Filings
The IRS typically requires biweekly or monthly deposits of withholding taxes and the employer’s share of taxes. In addition, most employers must file W-2s along with quarterly and annual returns. Note that the implementation of the Affordable Care Act has made the filing process even more detailed for employers. What’s more, the state has its own deposit and filing criteria.
Penalties vary for failure to pay, make timely deposits and file. For instance, IRS late-deposit penalties range from 2 percent to 15 percent, depending on when you make the deposit.
You may be hard-pressed to remember all the different withholding, payment and filing procedures. Consider using checklists (or flowcharts) and calendars to keep you on track.
- Subpar Recordkeeping
Nothing prolongs a payroll audit more than shoddy recordkeeping. And nothing makes an audit go more smoothly than sufficient documentation. To accomplish the latter, follow the payroll recordkeeping laws required by the federal and state government. Payroll records include documentation relating to minimum wage, overtime, equal pay and child labor.
Under federal law, you must retain payroll records for at least three years except for those dealing with wage calculations, which you can keep for two years. You also must establish a complete and accurate timekeeping system for your nonexempt employees to use. On top of federal law, you must also observe state and local regulations when it comes to recordkeeping.
Many employers entrust their payroll to a competent provider, reducing the likelihood of errors even more. However, make sure you are going with a payroll provider with strong financials and one that has been in the business for at least 10 years.