If you think their job is just to make sure you get a paycheck every couple weeks, think again. Of course, making sure you’re paid at the correct rate and that your check is deposited in the right bank is a huge part of what they do — but their job extends well beyond check writing. Payroll is also in charge of managing all the tax paperwork associated with each employee and independent contractor, as well as updating said paperwork anytime an employee’s status changes or when new regulations are implemented.
If you still don’t think the person handling your paycheck deserves some recognition in the form of a card and/or a nice, hot latte, then read up on all the potential pitfalls they must avoid week in and week out. And if you’re the guy in charge of payroll for your small business (you know, in addition to being in charge of HR, hiring, managing, accounting, stocking, etc.) maybe you should give yourself the gift of hiring an payroll company to help you navigate.
1. Misclassifying an employee
According to the IRS, there are generally two types of workers: An employee and an independent contractor, and each fills out different tax paperwork (a Form W-2 vs. a Form 1099). Classification is important in determining a worker’s entitlement to benefits including health insurance and a retirement plan (and subsequently, anything tax-related to these benefits), as well as determining if the worker is subject to federal income tax or employment tax withholding. Some companies classify workers as independent contractors to avoid paying things like Social Security, Workman’s Comp and unemployment insurance — however, if the worker isn’t a legitimate independent contractor the company can be liable for employment taxes. Intuit says if a company can answer yes the any of the following questions, then the worker is not an independent contractor:
- Does the company control the person’s work and hours?
- Does the company control how the work will be done?
- Does the company furnish the worker with tools and equipment?
2. Not issuing the appropriate forms
For each vendor, including independent contractors but excluding corporations, that provides more than $600 in services, you must issue a Form 1099. Companies that fail to do so could face penalties. In addition, if a company pays a vendor without first obtaining a Form W-9, the company could be responsible for mandatory backup withholding at a rate of up to 28 percent — even if the vendor is not subject to backup withholding (i.e., it’s a corporation).
3. Excluding non-cash forms of compensation
According to the IRS, most prizes and awards are subject to federal income and employment tax withholding because they are considered taxable fringe benefits. Gift cards — no matter what the amount — should always be included in taxable wages because they are viewed as the equivalent of cash. Make sure all managers are aware of this provision, so they can help you track any extras your employees might be receiving.
4. Not depositing withheld taxes on time
Companies are required to deposit their federal, state, county and municipal taxes at regular intervals (monthly, semi-weekly, etc.), in addition to reporting the earnings and withholdings for each employee, payments to contract workers and more at set deadlines (no wonder payroll professionals need such big calendars). Failure to deposit or report on time can result in penalties ranging from 2 to 15 percent, as well as interest rates.
5. Excluding expense reimbursements from reportable wages
Expense reimbursements can only be excluded from reportable wages if they are part of an accountable plan and meet the following criterion:
- Expenses are only reimbursed if they were business-related
- There is adequate accounting related to the expense
- Excess reimbursements are returned to the employer
Any employee expenses that do not meet these requirements must be reported as part of the employee’s taxable wages.
6. Incorrectly valuing fringe benefits
Things like spousal travel, company cars and country club dues are considered taxable fringe benefits — but placing a value on them for reporting income and employment tax purposes is tricky. For instance, there are three different ways to calculate the value of personal use of a company-owned vehicle. Learn more about reporting fringe benefits.
7. Miscalculating unemployment tax
Every state has an unemployment compensation program, and the Federal Unemployment Tax Act assists states in funding these programs. Not paying your state unemployment tax on time can result in the loss of your federal unemployment credit. Companies need to make sure they’re paying at the correct rate and that they’re using the correct maximum amount of wages. In addition, they should be aware if they’re in a state that also has an employee-paid tax.
8. Mishandling an employee’s third-party debt
Certain court-determined debt is collected from employees through the employer (i.e. wage garnishment and child support). If you have employees with this type of debt, it is your responsibility to withhold the pay, write a check, and pay it to the third party. There are plenty of rules related to wage garnishment, including how much of an employees wage can be retained and which parties should be paid first in the event an employee has multiple garnishments.
Learn about companies that can help you with your payroll on ResourceNation.com.