5 Common Payroll Mistakes and How to Avoid Them

Make a mistake on an invoice, and you’ll displease a customer. Commit an error while you’re preparing payroll, and you may have a bigger price to pay. You’re accountable to employees and regulatory agencies, all of whom expect absolute accuracy. Not providing that can have an impact on your employees’ livelihoods. Penalties and interest levied by taxing agencies can take a toll on your company’s own financial health.

So, be proactive. Know where missteps can occur to avoid them. Here are five common payroll mistakes and how to avoid them:

1. Classifying employees as contractors

As an employer in the age of the outsourced/single engagement economy, you may be hiring independent contractors to complete some projects. If this makes sense for you in terms of your workload, you’ll discover there are tax advantages, too – as in, you don’t have to withhold and pay their income taxes or employment taxes.

But, be very careful to make a distinction between independent contractors and employees. The IRS scrutinizes these employment arrangements; click here for an explanation of the differences.

2. Neglecting to process and store all payroll records

According to the U.S. Department of Labor, you must keep the records for at least three years. And they need to be comprehensive (click here for a list of exactly what must be available for inspection).

3. Omitting required payroll elements or incorrect calculations

If you only had to issue paychecks every two weeks and withhold and submit payroll taxes, that would be complicated enough. But there can be so much more. You must:

• Know the difference between pre-tax and post-tax deductions.
• Administer bonuses, expense reimbursements, garnishments, etc.
• Understand what employees owe and what you, as an employer, owe.
• Know exactly which agencies will expect you to submit payroll taxes (federal, state and local where applicable, unemployment, etc.).

4. Missing deadlines

This applies to actual pay periods as well as deadlines for filings and payments due to taxing agencies as well as payments for deductions for retirement plans, garnishments, etc.  If you miss payroll tax payments and filing deadlines, you can be assessed penalties and interest. Let that go on long enough without realizing you’ve made a mistake, and these add up.

There’s no reason to be tardy with your year-end reporting, either. Employees need their W-2s to file taxes, and your accompanying payroll reports are expected to be completed on time.

5. Using a payroll method that doesn’t work for you

Manual payroll-processing is a time-consuming burden and is prone to errors. Do-it-yourself websites can also leave you with many questions. We can help you determine what would work best for you, and add our services where they fit.

With these five tips, you can avoid costly payroll mistakes. Contact us if you have any questions or learn more about our client advisory services.