Finances are tight when operating a small business, so you might assume that running payroll on your own will save money. Unfortunately, the opposite is usually true because there is much more to payroll than just printing checks. Making even one of the common payroll errors described below could set you back a significant amount due to fines imposed by the IRS or your state government.
Misclassifying an Employee as an Independent Contractor
Hiring an independent contractor for project-based work can be ideal. You only pay the agreed-upon wage without having to worry about offering benefits or withholding taxes. The problem arises when you classify a worker as an independent contractor when that person meets the definition of a regular employee. Here is how you can tell the difference:
- Do you dictate the hours and location the person must work, or are they free to establish their own schedule and work remotely? Keep in mind that the more control you have over the person’s time and work output, the more likely it is for the government to consider them an employee.
- Do you have a written contract that outlines the details of at-will employment? If so, you need to treat that person as an employee.
- Do you pay for equipment such as a computer, or does the worker provide their own supplies as a self-employed individual?
Sometimes employers deliberately misclassify workers to avoid certain tax obligations and the responsibility to withhold payroll taxes and offer benefits, but often it is an honest mistake. Make sure you know the difference between these two classifications from the first day a new person completes work for your company.
Not Paying Overtime Wages to Non-Exempt Employees
Another common way of doing payroll incorrectly is paying non-exempt employees straight time for all hours, even when they recorded more than 40 hours in a rolling seven-day period. Under the mandates of the Fair Labor Standards Act, you must pay time and one-half the employee’s hourly wage if they worked more than 40 hours in a week.
Just as you must classify independent contractors and employees correctly, the same is true of exempt and non-exempt employees. The criteria for classifying an employee as exempt include:
- Annual earnings are above the minimum threshold for your state.
- The employee holds an administrative, executive, or professional position.
- The employee receives a set salary each pay period.
Misclassifying workers as exempt when they should be non-exempt and eligible for overtime pay will result in a fine from the IRS.
Missing Deadlines for Payroll Taxes and Reports
As an employer, you are responsible for remitting payroll taxes to federal, state, and sometimes local governments by the due date. This also includes Medicare and social security taxes. In addition to withholding these taxes from each employee’s paycheck, you must also pay the employer’s portion of Medicare and social security.
The IRS requires a quarterly report of earnings along with a year-end report. In 2023, those reports were due on January 31, May 1, and July 31 with the last quarterly report due on October 31. You must complete Form 941, Employer’s Quarterly Tax Return, and remit it by the above due dates. You will need to set up electronic funds transfer with the IRS to submit your payroll taxes on time. Missing a due date or failing to file a report or remit funds at all will result in a substantial fine.
Work with Compass HCM to Avoid these Common Payroll Errors
You launched a business because you believe in your products and services and have the desire to grow your company. Dealing with payroll and taxes is time-consuming, taking away from your original goals. When you outsource payroll to our local company, it frees you up to tackle your other priorities and provides you with reassurance against common mistakes. Contact Compass HCM today for payroll, HR, Insurance and Timekeeping services. We look forward to working with you!