Running a business is not an easy task. Letting one little responsibility slip, no matter how small it may seem, can be costly. According to recent insights, 40 percent of small businesses face an average fine of $850 per year due to mistakes regarding payroll. That same $850 can go a long way when it comes to small business expenses. From advertisements to bonuses, the possibilities are endless. Want to avoid having to pay unnecessary fines and fees? Keep reading! This guide will review seven common payroll mistakes that you’ll want to avoid. For more details, you may visit remote employee software.
Forgetting About Taxes
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Taxes are everywhere. You can’t avoid them, especially when it comes to running a business. Forgetting to pay them can be costly and could potentially set you back with needless fines and fees.
When it comes to taxes for small businesses, it’s not quite the same as paying individual taxes. The taxes you’ll have to pay will depend on how your business is set up.
If your business is set up as a corporation, you’ll be paying taxes at the corporate tax rate. Otherwise, your business is classified as a pass-through entity and is taxed at an individual rate. If you’re self-employed, you’ll have to pay self-employment taxes.
There are three significant taxes you’ll be paying, these include:
- Sales tax
- State Income tax
- Property tax
You’ll have to pay state income taxes unless if you live in a state that doesn’t have a state income tax. This includes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
If your business owns property, you’ll have to pay property tax. And If you’re selling anything you’ll have to pay sales tax.
Not Keeping Up With Regulations
No matter what size your business is, you are required to keep up with and follow specific payroll laws that are provided by the government.
One of the more common regulations is the Fair Labor Standards Act (FLSA.) The FLSA provides a structure for certain aspects of payroll like
- Minimum wage
- Hours worked
- And child labor
The minimum wage varies and is dependant upon which state you are doing business in. When it comes to overtime, employers have to pay employees who have worked over 40 hours for a workweek at a rate of one and a half times their regular pay rate.
Employers are also required to post the official poster of the requirements of the FLSA in an area visible to employees.
Not keeping up with regulations can be costly, wasting time and resources for the business.
Paying the Wrong Amount
Sometimes it’s easy to overlook little details when you are overwhelmed by numbers. In fact, according to a survey by The Workforce Insitute at Kronos Incorporated, over 50 percent of US workers have had an error on their paycheck.
When doing your payroll, missing a number or putting in the wrong one can be detrimental to business. It’s vital when doing payroll to double-check your work and look for any mishaps that might have happened.
Paying the wrong amount can be costly for multiple reasons. First, you’ll have to correct the error, which will cost money in terms of fees and fines. Second, you’ll most likely lose trust with the employee, which can be costly to get back.
Poor Payroll Record Keeping
Depending on the state you are doing business in, you may need to keep track of different forms. According to federal law, you need to keep payroll records for three years and payroll tax records for four years.
Documents that should be kept for at least three years include:
- Hiring documents
- I-9 forms
- Employee handbook
- FMLA leave paperwork
- Termination info
Pay stubs, tax documents, and any other documents related to payroll or employment should be kept for four years. And forms related to retirement or 401K should be kept for six years.
It’s essential to keep in mind that if you live in New York, California, Illinois, Or Washington, you’ll have different tax rules and should refer to the state laws.
To make payroll recordkeeping easy, and to avoid mistakes, try using a pay stub template.
Neglecting to Pay for Work Injuries
Employers are required by state law to purchase workers’ compensation insurance. The insurance pays a portion of the employee’s wages if they are recovering from injuries that happened at the workplace.
This only applies to workers who are employed by the company, not hired as freelance or contractor.
If you fail to pay an employee for an injury that happened on the job, you could face fines, or, even worse, a lawsuit by the employee. To avoid this, make sure to purchase workers’ compensation insurance if you’re in a state that requires it.
It is recommended to keep track of all incidences that happen at the workplace to make sure an employee does not blindside you.
Wrong Classification of Employees
Another costly mistake that can happen with payroll is determining the wrong classification of your employees. Classifying employees in the wrong category can lead to underpaying on taxes.
Hiring freelancers or contractors can save the company money. They are cheaper when it comes to training, taxes, benefits, vacation time, and office space. However, classifying them incorrectly can end up costing your big-time!
Wrong Employee Information
Having the correct employee information on file is crucial. Entering the wrong information is careless and can lead to delays in taxes.
The best way to avoid this is to talk to employees after filling out the W2 to double-check that their information is correct. Stay ahead of these things by staying organized and double-checking every step of the way.
Final Thoughts on Payroll Mistakes
As you can see, payroll mistakes can be very costly to your business and also a waste of time. It’s best to stay organized and make sure you are thorough with payroll record keeping. Staying on top of this will save you much needed time and money.
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