Owning a business after being an employee can be very rewarding. You are the captain of the ship and can chart your course without having to answer to anyone else. When you get to the point where you need employees, however, it’s indispensable to realize that being an employer can be complex when it comes to payroll. To ensure the best chance of success, make certain you avoid prevalent payroll errors:
1. Failing to Pay Payroll Taxes
We list this one first because there are forceful penalties attached. Brand-new small business owners may mistakenly think that failing to pay payroll taxes is akin to not paying personal income taxes. This is a hazardous error.
If you get in a cash pinch, DO NOT delay paying your payroll taxes as a stopgap measure.
This is what the Dept. of Justice has to say about withholding payroll taxes (trust fund money) and not turning it over to the IRS:
“An individual’s failure to comply with employment-tax obligations is not simply a civil matter. Employers who view amounts withheld from employee wages as a personal slush fund, treat withheld employment taxes as a loan from the government that can be repaid if and when they see fit, or whose business model is based on a continued failure to pay employment tax, are engaging in criminal conduct and face prosecution, imprisonment, monetary fines and restitution. According to statistics provided by IRS Criminal Investigation, in the 2015 fiscal year, individuals convicted of employment tax crimes were sentenced to an average of 24 months in prison.” https://www.justice.gov/opa/pr/justice-department-reminds-employers-their-employment-tax-responsibilities
2. Inaccurate Time Cards
Manual timekeeping systems that require team members to log hours on a paper timesheet are subject to errors that are both intentional and unintended. Employees often record their authorized starting time even when arriving late and do the opposite when leaving early. Even your most trustworthy worker can have trouble accurately recalling hours when filling out a time card several days afterward. Erroneous time cards increase costs of labor unnecessarily and burden your HR staff (which may just be you) who have to gather information to correct the time cards.
Paying employees a few minutes here and there for time not worked can really add up. Consider the following example. If you have 25 team members who estimate their hours with an extra 8 minutes of time each day for which they were not on the job, you will overpay:
3. Misclassifying Employees
It is tempting for an employer to designate an employee as an independent contractor. In most cases, employers are not legally obligated to withhold and pay Social Security, unemployment, and Medicare taxes for money paid to workers classified as independent contractors. In addition, employee classification a host of other things including benefits eligibility, minimum wage provisions, overtime pay eligibility, and workers’ comp eligibility. Employers who misclassify are in jeopardy of state and federal penalties and should consult the comprehensive DOL guidance on the matter to be safe. The nature of an employer-employee relationship can also evolve over time and sling the classification. It’s important to review the relationships periodically.
Berndt CPA serves hundreds of organizations like yours and can help you avoid these common pitfalls. Call us today at 608-274-7473.
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