- May 18, 2017
- Posted by: Smith & Smith
- Category: Blog
Running a small business or even a large company can be a daunting task. There are many hurdles that can get in the way of establishing a smooth sailing business that relies on both employees and independent contractors.
Costly mistakes are bound to happen, and these mistakes often revolve around payroll related issues and not knowing how to classify employees. In 2014 alone, U.S. companies were fined roughly five billion dollars in payroll tax penalties.
That is a hefty price to pay for something that can be resolved using the right tools. Below are examples of common payroll mistakes that businesses make and the best ways to avoid them.
Demographics: Get Them Right
Every employee has his or her own record of their name, residence, Social Security Number, deductions, or direct deposit information.
Entering any of the aforementioned data incorrectly can lead to a flood of mistakes regarding the accuracy of Social Security Records, W-2s and tax payment.
Being proactive and making sure that your employee records are error-free will save you both time and money in the future.
Falling into the Trap of Misclassification
According to the IRS, if you are a business owner, then you need to figure out the difference between your own employees and independent contractors.
If you end up putting the people who work for you in the wrong category then you risk failing to withhold and pay Social Security and Medicare, and paying unemployment taxes as well.
The IRS defines employees as workers if you as a business owner or company control the nature of the work, how it is done and when.
Making the mistake of categorizing an employee as an independent contractor may hold you liable for this employee’s employment taxes.
Exempt vs. Non Exempt
According to the Fair Labor Standards Act (FLSA), employees are placed into two categories depending on whether they receive a fixed salary or work by the hour.
Hourly employees are placed in the non exempt category which makes them eligible to receive overtime.
Managers, executives and outside sales staff are examples of employees who are placed in the exempt category. They are excluded from minimum wage and do not get paid overtime either.
Falling Behind on Paying Your Taxes
Entering the often confusing and time consuming world of taxes is inevitable for business owners. Making the mistake of missing deadlines and filing paperwork containing errors can lead to plenty of trouble.
Your business may become at risk of being audited and you will be subjected to penalties as well.
Setting up an efficient and reliable calender system in place will help you navigate the turbulent waters when filing your payroll taxes.
Stay Ahead of the Curve
Staying ahead means being constantly up to date when it comes to brand new regulations and laws that have an impact on payroll.
The consequences of falling behind on this important step can lead to failure to collect and pay local taxes and withholding federal income tax for example.
Keeping your eye on federal, state and local tax agencies, their updated websites and newsletters can save you a world of financial trouble.