The payroll process is complex and exacting. Our clients, like you, work hard to get their payroll right each period. Still, there are common mistakes that get made that can be prevented with a little planning and education.
We’ve assembled a list of five of the most common payroll mistakes that we see each year. Are you making any of these?
1. Missing Deadlines.
Employees expect their paychecks and their direct deposits to arrive on time. The governmental agencies for which you withhold taxes, deductions, and garnishments want their money on time as well. Often, each agency also has its own filing and fund deposit deadline. Miss these deadlines and your company could face large penalties.
To avoid fines and penalties, we suggest that a payroll filing and deposit deadline calendar be created each year that includes all federal, state, county, and local tax deposit date and filing date. Remember to give yourself enough time to make the deposits and filings when creating the calendar.
2. Not Keeping Employee and Payroll Records Accurate and Up-To-Date.
Companies lose millions every year because of payroll record keeping errors. Overpayments due to poor timekeeping practices or clerical errors on rates are just part of the issue. When payroll records are not accurate and up-to-date, internal and external audits take longer to complete and governmental withholdings can be incorrect, subjecting the company to penalties, fines, and amended filings. These direct and indirect costs can add up quickly. One of the most common record issues is a mismatch between employee names and their Social Security Administration (SSA) records. It is recommended that you verify all names and Social Security Numbers each year using the SSA’s free verification service.
To avoid these issues, review all employee information annually. A best practice in this regard is to verify this information with each employee when you request an updated W-4 from at the end of each calendar year. This is a natural time to have the employee verify their information at the same time they are adjusting their pay withholdings.
3. Not Properly Handing Garnishments.
There are numerous reasons that employees can be court ordered to have money withheld from their paychecks. Most states require that child support is withheld and there are other settlements and levies that can be withheld or garnished from a person’s pay check by the court. To further complicate this issue, some of these garnishments have a higher priority than others.
The important thing is to comply with the garnishment order as quickly as possible. It is also your responsibility to remit the withheld funds to the correct agencies within the timeframe specified within the order. Failure to do so can lead to stiff penalties for the company. Make sure that when you set up the garnishments in your payroll system that you denote the garnishment source so the funds are tracked and remitted appropriately. If you do not understand a garnishment order, contact the issuing court for clarification.
4. Neglecting to Send 1099 Forms.
All independent contractors who receive $600 or more in compensation in a calendar year are required to receive a 1099-MISC form from your company by January 31 of the following year. Many companies fail to send these forms out, and when the forms are sent out, they are late or contain incorrect amounts.
Avoiding these issues starts at the beginning. Before you make the initial payment to the independent contractor make sure that you have the contractor’s name and or company and Tax ID or EIN recorded on IRS form W9, as this information is required to produce the 1099 form. Then the transaction should be flagged so the end of year reporting can be easily summarized and grouped to produce the 1009 forms. Once the contractor tax information is available and the payment information is summarized, producing the 1099 forms is straight-forward. Make sure that producing any necessary 1099 forms is part of your end-of-year processing checklist.
5. Misclassifying workers.
It used to be most companies only had two types of workers: exempt and non-exempt. However, today’s companies are becoming flexible and agile when it comes to employees. More frequently companies work to keep the permanent employee count to a minimum and hire temporary workers, independent contractors, and consultants to fill in the gaps in workers or knowledge. These other workers help to keep fixed costs down and provide more stability for the more permanent employees.
The IRS has clear guidelines on how to classify the people who work for your company. This page from the IRS is a good starting point. If you have questions about classifying an employee as exempt or non-exempt, that is covered by the US Department of Labor Wage and Hour Division Office. Also make sure to check your state and local regulations to ensure compliance with how you are classifying workers.
Payroll is still a complex process. We hope that this list of common payroll mistakes helps you either know you’re on the right track or draws your attention to a potential issue. Please feel free to contact us if you have any questions or have seen other common payroll mistakes.