5 Common Payroll Mistakes You Need to Avoid

calendar October 9, 2019

Nobody likes mistakes, but they happen anyway. 

When it comes to your company, you should do everything in your power to avoid mistakes that can end up costing you. Payroll is an area filled with opportunities to make mistakes, from setting up a functional payroll system to filing taxes.

Unfortunately, it’s all too common for payroll mistakes to occur that result in fines and penalties. Federal and state laws require all employers to collect, report, and pay payroll taxes. Taking care to ensure that these taxes are filed correctly and on time can save you a major headache in the future.

The first step to avoiding costly mistakes is knowing what to look for. Here are five common payroll mistakes that can trip you up.

1.Getting employee information wrong

Incorrectly inputting data such as birthdates, full names, and social security numbers can cost your company in government penalties and overpayments. This is such a common mistake that the social security office has a phone number designated specifically for the verification of employee social security numbers.

As of March 2019, the social security administration has also begun to mail out an Employer Correction Request Notice (EDCOR) when they find a discrepancy between an employee name and social security number.

Slow down and make sure you enter the data correctly the first time. It will save you a lot of trouble in the long run.

2.Classifying employees incorrectly

Your company can also be penalized for misclassifying employees. Workers can either be classified as employees or contract workers. Misclassifying an employee as a contract worker results in being held accountable for the employment taxes for that worker.

Employees must fill out a W-2 Form so that you can deduct money for taxes from their paycheck. Independent contractors who are paid more than $600 a year are responsible for paying their own federal and state taxes and need to receive, complete, and submit a Form 1099.

3.Missing deadlines

Failing to pay your employees on time can cause some serious resentment and decreased morale among your workforce. Make sure you are taking into account any bank holidays that fall on paydays and adjust your payroll processing schedule accordingly. It’s also important to know your state’s laws covering when you are required to pay employees who have left your company, as many states have specific time limits in place.

Additionally, failing to pay payroll taxes by the due date set by the IRS can result in a 15 percent failure-to-deposit penalty, as well as interest charges. Keeping a strict schedule for your payroll activities will help you avoid missing important deadlines such as your employee’s payday or your tax filing due date.

4.Miscalculating overtime

The FLSA requires employees to be compensated for all overtime worked. However, calculating overtime can be confusing as every state has its own laws around hours worked past the regular 40 hours a week. Overtime pay is 1.5 times the amount of the usual rate. That means if an employee makes $10.00 and hour, they would make $15.00 for every hour they work overtime. It is your responsibility as an employer to know what your state requires for hours worked overtime and to meet those requirements.

5.Keeping track of current laws and regulations

In order to stay in compliance, you need to be on top of state and federal employment laws that may affect your payroll activities. This could mean new laws relating to employee overtime exemption status or minimum wage requirements.

Check on your state’s laws and requirements to make sure you are up to date and always prescribing to wage and hour laws that are more favorable to your employees. For instance, if the state minimum wage is higher than the federal minimum wage, you should be paying the higher amount to your employees.

6.Use your resources

Making sure you are in compliance, staying up to date with new laws and regulations, and creating a solid payroll system is extremely difficult, no doubt about it! Fortunately, there are many services available to help your company do it right.

You can opt to outsource your payroll to a third party that specializes in payroll and keeping you in compliance with local and federal laws. You also have access to a lot of useful information on the IRS website, including informative videos and learning material.

However you chose to go about it, make sure you take the time to familiarize yourself with common payroll mistakes so you can identify and avoid them as you develop your payroll system. Remember, awareness is the first step to avoiding trouble.


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