Paying employees seems easy enough. Their hours are logged, and you sign the checks; however, there’s more to payroll than that, and overlooking these critical aspects of paying your employees can have costly consequences. Here are five common payroll errors small business owners make and how to prevent them.
1. Not Paying Taxes Year-Round
Not paying taxes year-round is especially critical for new business owners because most of us are used to paying taxes by the April 15th deadline each year. But remember, that is for individual taxpayers, not business owners. Business taxes are usually paid year-round quarterly. The IRS has a business tax payment schedule, and so does each state. Your tax payment frequency depends on payroll frequency, so be sure to check with your accountant to determine when and how much tax you need to pay on a federal and state level.
2. Misclassifying Employees
If you have employees and freelance contractors working for your small business, be sure to classify them correctly. When it comes to payroll, it can be costly if you don’t. For example, if you misclassify an employee as an independent contractor, you may underpay payroll tax and have to pay retroactive payroll taxes on that employee down the road. Remember, to classify a worker as an independent contractor they must be in business for themselves. If they are not, chances are they must be classified as an employee if they work for you. According to the IRS, an individual is an independent contractor if the payer has the right to control or direct only the work result, not what will be done or how it will be done. A person is not an independent contractor if they perform services controlled by an employer (i.e., what will be done and how it will be done). Even if the worker has freedom of action if the employer can legally control how the services are performed, that worker is an employee.
3. Not Considering Payroll Schedule
How often your employees are paid impacts your bottom line and your employees. Whether you pay employees weekly, every other week, or monthly, it is essential to know how your payroll schedule affects your cash flow. You should consider payroll processing fees, administrative costs associated with payroll, and employee needs. For example, weekly payroll is most costly for employers due to preparation frequency. Monthly payroll is less expensive for employers but the least preferred by workers. Each payroll schedule has its pros and cons, so it is a good idea to determine a payroll schedule that works for your business as well as your employees.
4. Keeping Up with Paperwork
For payroll, employers are legally required to maintain specific paperwork. For example, I-9 forms to verify that all employees are legally eligible to work in the United States, a W-4 form to determine each employee’s tax withholdings. Some states require new-hire reporting. Many documents such as new-hire paperwork can be filed directly by your payroll preparation company but be sure to ask and be up-to-date on your state’s laws regarding the paperwork that must be kept on file for employees.
5. Forgetting Bank Holidays
Remember, bank holidays – business days when banks are closed – are not considered business days when it comes to payroll processing, so you need to account for these. On bank holidays, direct deposits are not made. This isn’t always a concern; however, if your payroll schedule falls on a bank holiday, it could cause your employees some aggravation. To avoid these issues, check the bank holidays for the year and plan accordingly in advance.
Remember to consult your trusted accountant or CPA for more on these payroll errors and others. Laws and regulations are ever-changing, so it pays to stay abreast of those to avoid potentially costly payroll errors for your small business.