The payroll process is a necessary component of any business and making sure it’s accurate is exceptionally important. Even the smallest error can have a lasting impact on your company’s bottom line when you consider penalties, fines, and even lawsuits. This can be a nuisance to mid-size businesses but devastating to a small business.

So before you bring on new employees, it’s a good idea to familiarize yourself with the basics of payroll and labor laws. An industry-leading platform like When I Work keeps your schedule, timesheets, and payroll all in one system to automate your calculations and even help ensure compliance. Such a solution can drastically reduce the chances of human error. The thought of making a critical payroll error can be anxiety-inducing. If you don’t comply with tax regulations, you may face costly fines, penalties, and audits from the IRS. Tax authorities can file liens or levy your bank accounts and any business income you have.

Common Payroll Mistakes & How To Avoid Them

Learn more about payroll services with Nav’s payroll software resources. Employers are working with independent contractors and interns more than ever. But as you may know, gig workers aren’t entitled to benefits such as overtime pay and minimum wage. If your employers aren’t properly classified, they could miss out on benefits, and that could put your organization in hot water. Payroll responsibilities are a crucial part of having employees. Of those payroll responsibilities, the most important is accurate payroll.

Don’t have the time to check government websites or accounts to monitor tax rate changes? Online payroll software should automatically update with new tax rates each year. However, business-specific tax rates (e.g., SUTA) may still require you to verify your new yearly rate through your online business account or mail.

Unfortunately, there are many places where payroll mistakes can occur. The biggest issue with this is forgetting to detail smaller exchanges that are outside of the standard salary or hourly payment. For example, not reporting sales incentive gifts, even if it’s just a $25 Starbucks gift card, to the IRS may result in penalties and tax liability for your organization. The Internal Revenue Service 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.

Filing your payroll taxes correctly and on time is extremely important. Keeping up with monthly deductions and reports can keep you on the right side of the IRS and help you avoid complications from employment taxes down the https://accountingcoaching.online/ line. A payroll software or service can help you save time, reduce errors, boost security and stay compliant. The Fair Labor Standards Act (FLSA) establishes that you have to pay people a premium (aka more) for overtime.

Our guide on the difference between independent contractors and employees goes over the distinction in detail, provides resources, and more. Mistakes happen in business, but mistakes in your payroll, specifically, can cause unnecessary stress for your HR and finance teams. Payroll errors impact the employee experience and can mean the difference between employees staying or leaving your business. The FLSA requires employers to keep three years’ worth of pay records, including hours worked, payment rates and the date of every payroll. Many states impose their own record-keeping requirements on employers that may extend beyond three years.

Common Payroll Mistakes and How to Fix Them

An incorrect payroll frequency can result in penalties or fines for your business. Because some states send notices each year to alert employers to tax rate changes, open and review all mail from the state or local governments. Payroll information should never be disclosed to anyone outside of the payroll department, your senior management teams or your payroll service. Whatever you decide to do, make sure you have a solid plan in place when running payroll to ensure you can avoid as many mistakes as possible. Keep an eye on your inbox or mailbox for notifications about rate changes. For some extra peace of mind, you can also contact your state and local governments to check on rates or do a quick Google search.

1. And if your business is a corporation or an LLC, you can also get a list of forms and due dates from your state tax agency.
2. Among those surveyed, the most common mistakes include those related to time and attendance, and expenses, which occur on average more than once per employee per year.
3. Evaluating the long-term costs of keeping payroll in-house can shed light on the possible efficiencies of using a payroll service provider.
4. If your company doesn’t have a reliable way to track employee hours or paid time off, your chances of making a payroll overpayment or underpayment mistake skyrocket.
5. Employees can falsify timesheets or forget to enter their hours worked.
6. Many accounting software solutions will also have a payroll solution, or will integrate with the payroll service you use.

If you accidentally underpay an employee, you’ll undoubtedly hear about it. But if you slip and overpay your employees, you may not know for weeks explaining amortization in the balance sheet or months. As a business owner, it’s up to you to manage payroll with the same precision you afford to every other part of your business.

Human Resources

On the other hand, when payroll mistakes crop up, their impact can ripple across an entire company. Employee misclassification is one of the most common and costly errors. Not only can misclassification affect an employee’s wages and benefits, but it can also cost the government valuable tax dollars, resulting in an audit. For example, if your company works with freelancers or independent contractors, ensure that they are not misclassified as W-2 employees. 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.

And although many employees have spotted mistakes, the good news is that most people who run payroll have an accuracy rate of 97%. If you do happen to creep into the 3% error rate, it can cause unnecessary stress for everyone involved in your HR and finance teams. Businesses must submit taxes to federal, state, and local authorities, at specified times and in designated forms. Such demands greatly amplify fiscal compliance and payroll administration obligations. There are a number of things you can do to help avoid making mistakes while processing payroll for your business. You must deposit your federal taxes on specific dates, but those dates are partly determined by the total taxes you report on Form 941.

Taxes are always changing and tough to keep track of, especially if you have locations in multiple states or jurisdictions. Monitoring changes can easily become a full-time job, but you’ve got to get it right or Uncle Sam will come knocking. Copies of Form W-2 must be sent out to your employees and other parties (e.g., Social Security Administration and state or city) by January 31 each year. If you miss the deadline, you could face some pretty hefty penalties. Comprehensive coverage for your business, property, and employees.

Payroll, tax filings, and employee benefits — all in one place

Either way, you’ll need to properly calculate the appropriate amounts, withhold them from your employees’ paychecks, and make timely deposits. Just like the fine for late deposits, the Failure to Deposit Penalty of up to 15% of the unpaid amount applies if your deposits are not in the right amount. To ensure proper calculation, many companies choose to outsource payroll to a third-party provider. Having the proper payroll software and a project management tool can help prevent payroll mistakes from happening. These systems will help you track all of your employee’s professional services, organize and assign payroll-related tasks, and they’ll save time on manual data entry and evaluation. Tools like Wrike also allow employees to track their hours and overtime directly on the platform.

Although different states have different time frames, the basic rule is that payroll errors should be paid promptly. Doing so can help avoid penalties and minimize the risk of overpayment. Nonexempt employees are entitled to overtime; 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.