While it is true that all of us make mistakes, it is advisable to try to avoid them when it comes to payroll. Regrettably, there are a lot of things that can go wrong. It is therefore important to acquaint yourself with the fundamental principles of payroll and labor laws before you hire new workers.
In order to help you reduce the chances of making errors when you are preparing your payroll, we have summarized the most frequent mistakes below, and the best way of avoiding them. (Please note that this is just a general guide. To get advice that is specific to your type of business, please contact us ).
Organizing your payroll
Taxes are usually some of the more complex and crucial elements of a payroll. You must ensure that you withhold the correct tax amounts from the paychecks of your employees and also know the amount that you require to pay as an employer. For more information regarding our payroll services, click here.
According to the US Small Business Administration(SBA) creating a payroll plan for your employees involves following a number of steps, namely:
- Getting an Employer Identification Number ( or EIN).
- Establishing whether you require local or state tax identification numbers.
- Determining whether you want an employee or independent contractor.
- Making sure that the new employees forward their correctly-filled W-4 forms.
- Setting up pay periods that harmonize IRS tax withholding.
- Formulating a compensation plan for vacation, leave and holiday.
- Selecting an external or in-house service for payroll administration purposes.
- Picking the personnel who will run your payroll system.
- Identifying the records that should stay on file and the duration.
- Preparing the required quarterly and annual reports
The IRS is in charge of maintaining the Employer’s Tax Guide, which details the federal tax requirements that are applicable to your small business. Contact your state tax agency to learn more about employer filing requirements.
Lagging behind when it comes to filings and tax payments.
The issue of taxes again comes into play. Depending on the total amount of payroll taxes collected, the tax deposits might be due on a monthly basis (most likely scenario), biweekly or on the following day. Also check if your city or state collects income taxes and confirm when they are due. Making late payments can attract penalties and result in accrued interest expenses. Therefore it is important to observe submission guidelines and make your payments promptly!
In addition, ensure that you plan in advance and register your company in good time before taxes fall due. Get the applicable local, state and federal payroll tax identification numbers so that you send in your tax filings and make payments to the government punctually.
Incorrect overtime computation
The Fair Labor Standards Act requires that workers must be paid more (a premium) for overtime. But it can be challenging to calculate overtime because you might need to adhere to local wage laws if they are more advantageous to your workers. For instance if your business is based in California, overtime means much more than working over 40 hours in one week. You also need to take into account the rules for daily overtime which is 1.5 times the normal pay and double time, which is twice the normal pay. There is a useful guide prepared by the Department of Labor that lays out the rules for every state.
Processing the payroll when it is too late
Being the owner of a small business, chances are that you are busy running the business. But it is important to ensure that your workers’ payday does not slip by. You might end up overpaying or underpaying an employee if the payroll is processed in a rush or find yourself spending time rectifying mistakes and even grappling with fines.
An additional tip; Based on whether a worker is fired or quits, there are some states that insist on employers giving the outgoing worker his or her final paycheck in a relatively short period of time-even on the same day. Although you do not expect any worker to leave, check the rules in your state in order to ensure you that you are not caught unprepared in case it happens.
Neglecting to maintain proper records
The word ‘audit‘ is dreaded by a lot of people, whether they are operating a small business or a large company. If you are unfortunate and it happens to you, maintaining accurate records of your business transactions will greatly assist you to cope with it, particularly payroll records. The law requires you to maintain proper payroll records for a minimum of three years-and there are some states that require businesses to maintain them for even longer periods. It is therefore important to check with the labor office in your state. The records that you need to keep differ from one state to the other, but they usually include W-4s, I-9s, payroll files (for example pay stubs and tax forms) and time sheets.
Poor bookkeeping practices
It is extremely important to ensure that payroll is integrated in your books. This is because at the end of the day, it has a direct effect on your cash flow. Being aware of the exact amount of money that you have at any given point in time enables you to establish how much can be invested in your employees and in your business.
We trust that this will help you avoid major payroll-related problems along the way. For guidance that pertains to your specific state, visit the website of your state labor office.