How to Avoid the 4 Most Costly Payroll Mistakes

From the time you become an employer, you are legally responsible for following all federal and state payroll laws to avoid crippling financial penalties and/or lawsuits – or worse yet, having to close your business altogether.

• According to the Internal Revenue Service, 40 percent of small to mid-sized businesses face IRS penalties related to incorrect payroll filing.
• These penalties can translate into staggering costs: As reported by the American Payroll Association, more than five million employers paid $7 billion in civil penalties to the IRS alone in 2017.

Payroll compliance is complicated, and legislative landscapes are in constant evolution. Here are four common mistakes to be aware of and avoid:

Four Common Payroll Mistakes Made By Companies

Depositing Employment Taxes Late

If you fail to deposit required employment taxes on time, you could face hefty penalties that increase based on how late you file. To avoid this situation, make sure you’re crystal clear on all your payroll tax due dates. Penalties can amount to up to 15 percent for deposits still unpaid more than 10 days after the date of a first notice.

Misclassifying Employees and Contractors

When you hire employees, the way each one is classified depends in large part on their job duties and structure. Generally, but not always, salaried employees are considered exempt, while hourly employees are non-exempt. Or, you may use independent contractors for some roles. These classifications play a huge role in how both you and the employee are taxed – and misclassification can be extremely costly. In worst cases, if a misclassification is ruled to be intentional, criminal penalties including prison terms can result.

Miscalculating or Failing to Pay Overtime

Chances are, keeping overtime costs to a minimum is a priority for your business. But if a non-exempt employee works more than 40 hours a week, the federal Fair Labor Standards Act (FLSA) dictates that they must receive overtime pay at a rate not less than time and one-half their regular pay rate. If you fall short on proper overtime payments, a worker can file a complaint with the Department of Labor. Then, not only will you have to pay those OT wages, but you also could face a $1,000 civil penalty, along with any additional penalties invoked by a particular state.

Keeping Inaccurate, Incomplete or Disorganized Records

It’s important to maintain accurate, complete, and organized payroll records, especially if you’re faced with an IRS audit. Otherwise, you could encounter a variety of penalties, fines, and other issues, depending on specific audit findings. The IRS requires you to keep most employee and payroll records for at least four years. The Small Business Administration (SBA) extends its recommended time frame to six years since some states have different requirements.

Need Help Managing Payroll? Key HR Can Help!

If you need help managing increasingly complex talent management matters including payroll and related tax compliance, Key HR has the solution. Through an employee leasing agreement tailored specifically to your unique business needs, we can take this stress off your plate – freeing you up to focus on the operational and revenue-producing side of running your company. Read our related posts or contact us today to learn more.