Payroll Penalties: How to Avoid the Common Errors That Can Cost Your Business Big Bucks

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Business owners are busy people. As a business owner, you likely try to divide most of your time between overseeing and running your business’s day-to-day operations and keeping an eye on your bottom line. Then there’s the time needed for handling customer service, HR, or supply issues, and trying to grow and improve the business in general. Keeping up with the books and other administrative and legal tasks can then feel impossible to do with such a heavy workload.

Indeed, it can often be all too easy to let handling your company’s payroll fall lower and lower down your list of priorities as you try to put out other fires. In many cases, when you do get around to payroll, you’re just focused on ensuring that everybody gets their paychecks on time. More involved payroll tasks, such as generating reports, updating tax info, or checking federal deposit deadlines, tend to get delayed or overlooked — until there’s a problem. With that said, beware of these possible snafus in the course of expanding your business.

Big Problems Due to Payroll Mistakes

Unfortunately, overlooking, mishandling, or ignoring your business’ important payroll tasks is an increasingly common problem for U.S. businesses. Reports show that for the 2019 tax year alone, the IRS assessed roughly $13.7 million in civil penalties due to employment tax errors. The same data indicates that at least 40 percent of small- to medium-size businesses incurred federal payroll penalties for the fiscal year, 2019.

Common Payroll Errors to Look Out For

If you aren’t making payroll a top priority in your business, it’s likely just a matter of time before you make a mistake. Some of the most frequent types of payroll errors include:

• Misclassifying workers. Anyone who does any work for your business must be classified as either an independent contractor or an employee. Depending on the circumstances, this can sometimes be a difficult distinction, but it’s an incredibly important one. Payroll and withholding rules are different for employees versus contractors.

• Mixing up pre- and post-tax deductions. Pre-tax deductions, which reduce employee tax obligations and employer tax expenses, are taken out of gross earnings before taxes. These deductions are commonly applied for employees deducting their share of insurance premiums or making elective-deferral contributions toward their retirement plans. But not all pre-tax deductions are equal. Be sure to understand the rules governing each type of deduction and be consistent about how you apply them.

• Missing federal deposit deadlines. Employers must deposit any amounts withheld for federal taxes, such as income tax or Social Security, either every month or every two weeks. Late payments incur ongoing interest and penalties.

• Keeping sloppy or incomplete records. Keeping complete and accurate payroll records is imperative for handling your taxes and managing your bottom line. Failing to produce accurate records can result in big penalties if a payroll issue arises.

How to Avoid Payroll Predicaments

Making sure your business meets all the appropriate payroll requirements is a complicated and time-consuming job with lots of room for error. To avoid making costly mistakes, leave it to the pros. A professional payroll service takes most of the risk and burden off your shoulders and keeps your business up to date. Today, there are countless options available, with the industry focus trending toward online-based payroll services.

Select an online payroll service that is compatible with your existing accounting services. Look for one that offers plenty of time-saving features, such as auto payroll, which you can set up one time and then let the automation handle the rest. The more time your payroll service saves you, the more time you have for other parts of your business.

Keeping up with your business’ payroll requirements is a challenging and time-intensive task, and errors can have major consequences. Using a professional payroll service reduces your risk of errors and frees up time you can spend on other tasks.

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