Paying your employees for the time they have put in is not as easy as you might think. The truth is that businesses of all sizes have to record everything. Organizing your payroll, making sure all info is correct, and staying current on all requirements is imperative to your safety and success.
Before you send your workers a check, you have to meet various tax and regulatory requirements. This is what makes processing payroll more complicated. In fact, it’s quite common for business owners to make payroll mistakes when they don’t have a bookkeeper. And it’s not something you want to ignore or try to fix after the fact. That’ll cause even more problems.
When processing payroll, you have to adhere to certain rules. However, you must first avoid the following common mistakes to save money and stay compliant with payroll taxes.
1. State Unemployment Tax Errors
Unemployment taxes also have to be accounted for, just like payroll taxes. They are paid by employers and withheld at the state level. You must ensure that you file them regularly.
Keep in mind that every state has its own requirements and rates which you have to meet depending on the state where your employees reside. You have to be extra careful if you operate a business in different states or close to the state border.
2. Employee Information Errors
One of the most common mistakes that you need to avoid when dealing with payroll taxes is employee information errors. It occurs right when you hire an employee and complete his or her paperwork or make changes along the way.
If you are not cautious, it is easy for errors like wrong Social Security numbers, addresses, and even misspelled names to occur. These costly mistakes are often not easy to correct and only cause clerical headaches in the future.
It’s even possible for the IRS to fine you for an inaccurate tax return or delayed income taxes. You have to be very meticulous and check the information entered with your employees a few times to ensure accuracy.
3. Outdated Employee Information
Another mistake that startups make that costs tax time is outdated employee information. Even after you have correctly entered employee information into your payroll processing software, you also have to maintain it. Otherwise, your records become outdated.
You have to regularly check employee legal name changes, addresses, tax payments, benefits, and more. Generally, you must update the information of workers when they have a baby, get married, or move to a different area.
4. Employee vs Independent Contractors
In addition to the above, it’s common for small businesses to mis-classify their workers as independent contractors when submitting tax forms. If you are unaware of accounting principles, you wouldn’t know how to properly classify employees.
Now, you have to consider IRS-mandated requirements. However, these are not as well-defined. Only if you have control over how an employee performs his or her duties, would you be able to classify him or her as an employee. It is important that you learn more about what makes an employee different from a contractor.
We live in an era where our economy is growing more complex and more connected. More and more people are working as contractors, are employees working from home, or working several jobs for multiple companies.
Startups such as Lyft and Uber have blurred the lines between how workers and contractors are classified. You have to be careful. President Obama had initially issued an executive order in 2014 to increase scrutiny in order to prevent companies from mis-classifying workers. The government has only enforced more stringent laws ever since.
5. Payroll Tax Inaccuracies
Small businesses waste $850 in fines on average every year for late or missed payroll tax payments. The fines are imposed by federal and state tax agencies. However, if your business makes plenty of payroll tax errors, it would only add up business expenses that you would be unable to claim in your tax return.
Payroll taxes must be paid at the local, state, and federal levels on a pay as you go basis. This means that payments would be due on every payday. There is no denying that keeping up with tax requirements would prove difficult if your business operates in different locations or if you don’t have a centralized office and rely on a distributed team.
The Importance of Maintaining an Accurate Payroll and Payroll Tax Process
The main payroll mistake that you can make is not knowing just how important it is to maintain an accurate payroll and payroll tax process. This is why you need to learn more about establishing a proper tax process. Ignorance is never an acceptable excuse when the taxman comes calling.
The payroll process represents an accounting system that connects your organization with various agencies that are responsible for the collection of taxes on the wages you pay your employees.
As you are fully accountable to both your employees and tax authorities, you have to ensure that the payroll process is precise. Besides, an accurate payroll saves you from the stress and hassle that would emerge when your tax deadlines are near.
Business owners must also understand that maintaining an accurate payroll process is an ethical issue. When you hire workers, you enter a contractual relationship with them that requires you to compensate them for the hours they have worked.
If you fail to maintain your payroll, you would be unable to adequately compensate employees and it could be considered a form of theft. This could be used as grounds for litigation against you by your employees should a conflict arise.
Moreover, an accurate and precise payroll process is integral to reconciling tax liabilities. Every business is legally responsible for withholding taxes from employees to pay federal and state income taxes along with Social Security.
Only when you have a precise process, can you pay taxes accurately. If you fail to do so, you would end up accruing expensive penalties which could result in a tax audit.
Consequences for Certain Mistakes
Payroll errors can hurt your business in ways that you cannot even imagine. Here are some of the repercussions that you need to know.
Damages Employee Trust: When employees trust an employer, they are likely to work hard and increase your productivity. However, if you damage this trust, it would affect productivity adversely and even result in your star performers looking for work elsewhere.
Wastes Times: Dealing with tax inquiries and corrections only wastes time. You will end up spending a huge amount of time trying to correct the errors.
Costly: Certain payroll mistakes would prove costly as you would have to pay for them without being able to claim the expense.
Damage to Your Reputation: When you make payroll mistakes, it damages your reputation in the market and deters customers from choosing your business and keeps quality talent from partnering with you.
The Upside of Staying On Top Of Things
There are many reasons that will convince you to stay on top of things. Let’s look at a few of them.
Reduces Expenses: One of the main reasons to focus on your payroll process is that it helps reduce expenses. As the IRS wouldn’t require you to pay any penalties.
Boosts Employee Morale: By taking care of payroll taxes and paying your employees properly without interruption, you will also notice an improvement in employee morale. If all is well with their paycheck, their tax payments and their benefits, they’ll stay loyal to you and dedicated to their work.
Keep Your Business Running Smoothly: An accurate payroll system keeps you clear of the law and the risk of getting shut down, which would definitely affect your brand and your relationship with your customers.
Accurate and organized payroll is a great foundation for the rest of your accounting and bookkeeping process, helping you accomplish the basics before adding on everything else. This lowers your stress and helps you focus on leading your team.
Benefits of Hiring a Professional Payroll Tax Expert
There are many advantages of getting professional payroll tax help from an experienced bookkeeping service provider.
Helps You Stay Organized: One of the main benefits of a professional bookkeeping service is that it would provide an effective system to ensure that you’re able to manage responsibilities, tasks, and meet deadlines.
Define and Document Your Processes: The payroll tax expert would provide clear documentation of the process which you can utilize for finding answers to all types of questions you might have.
Avoid Mistakes and Spot Problems Early: Bookkeepers are always monitoring your process and crunching the numbers. This in turn allows them to spot errors within documentation or your process, correct some past mistakes and spot opportunities for doing things better in the future.
Keep Up with the Latest Laws: Professional bookkeeping services are always up to date with the latest laws and tax codes. They will work with you to make sure you don’t miss a single beat.
Conclusion
Your payroll process is nothing to take lightly. It is part of the foundation of a strong company. It keeps you on the right side of the law, keeps you organized, protects your relationship with employees and customers, and makes other accounting practices run more smoothly.
Sound Accounts helps small business owners create and manage the perfect payroll and bookkeeping process. Connect with us today to learn more about reducing stress and increasing productivity with better bookkeeping.
For more information about the payroll process, check out our frequently asked questions below.
FAQ
What Is A Payroll Error?
A payroll error can be inaccurate information, a wrong payment, a late or missed payment, improper employee designation, or several other things.
Do Payroll Taxes Affect Employees?
If you aren’t keeping up with your tax process, the consequences can destroy your relationship with valued employees, leading them to talk bad about you and your organization, look for work elsewhere and sometimes even bring litigation against you.
What Challenges Do Payroll Professionals Encounter During The Payroll Process?
Payroll professionals encounter a number of challenges during the payroll process including the following.
- Record keeping
- Misclassification
- Managing changes
- Tax non-compliance
- Over or under payments
- Manual payroll processing
- Confidentiality and privacy
- Keeping up with the most recent law and regulatory changes in the relevant states
