Updated June 2018
Simply, the list of a business’ employees and the amount of money they’re owed – wages and salaries.
Is your business growing and you suddenly find yourself wondering how to do a payroll? There are various details that go into setting one up and managing it, and it can become more complex the larger your business grows as you hire more employees with varying salaries, bonuses, and hourly wages. Here are some of the most common payroll mistakes that your company does not want to make in the first place (unless you’ve already experienced them!)
8 Common Payroll Mistakes
Setting up payroll incorrectly – employee classification
Reporting compensation for employees vs independent contractors is very different and it’s important to get it right in the system right away, to avoid any future IRS encounters. As well, if you incorrectly classify one for the other, you may be liable for employment taxes later on.
Having a common-law employee might include:
- Having wages withheld for taxes including Social Security and Medicare
- Unemployment tax on wages paid
- Benefit entitlement
- Retirement plans
- Equity, etc
Independent contractors usually:
- Don’t have wages withheld
- Require a 1099 tax form instead of a W-2
- Will personally be subject to more taxes depending if they have a business entity like an LLC or use a sole proprietorship
Forgetting to record impromptu checks
This may seem elementary, but when you’re in a hurry and are quickly writing out bonuses and pay advances, this will leave your books off balance and leave you wondering what happened…
Setting up a payroll schedule incorrectly
State laws generally have a minimum pay period – the minimum frequency you’re allowed to pay employees per month or year. Most often employers choose twice per month (semi-monthly) or biweekly (every two weeks). Weekly is the most preferred but costs the most in payroll processing. Cash flow for your business is something to keep in mind when choosing pay frequency.
Filing tax payments late or incorrectly
You’ve collected taxes from your business and employees. Now what? It’s important to file payments on time to avoid any late fees, and some businesses set up a quarterly estimated tax payment to ensure they keep up and don’t find a large, unwelcome surprise at the end of their tax year.
Excluding reimbursements incorrectly
To avoid having business-related reimbursements be in danger of being included in taxable income, have an accountable plan which records all the expenses with a documented business association.
Not obtaining a Form W-9 from vendors before paying them
While some vendors are exempt from backup withholding, if a company pays a vendor without obtaining a W-9, this could lead to future audit issues/penalties for the amount the IRS thought should have been withheld before learning of the exemption.
Excluding the fair market value of gift cards or prizes in an employee’s income
Most awards and prizes are considered to be subject to federal income tax withholding. Some things can be excluded if they’re worth very little, but cash like gift cards should be included.
Failing to include the appropriate value of taxable employee fringe benefits
These are expenses like spousal travel, company-owned vehicles, dues for country clubs, housing, etc. A company should value these fairly with a consistent system. There are three different ways to calculate the value of using a company car…how does your business handle this issue?
Doing payroll can be a hassle if you’re like most business owners with 50 other things to do today! If you think handling payroll management yourself will take away too much valuable time you need to focus on running your business, think about payroll outsourcing.
D&M Accounting provides payroll services for large and small businesses alike. Contact us today and we’ll be glad to help you out or answer your questions. We also offer software training with the most up-to-date systems like QuickBooks and assistance with the preparation of your financial statements.
“OK Google: payroll processing services near me!”