Common Payroll Errors and Their Consequences

Common Payroll Errors and Their Consequences
Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Reading Time: 6 minutes

According to the IRS, Incorrect payroll filing penalties have affected 40% of small to midsize enterprises.

Payroll errors are, unfortunately, common, and the resulting penalties can be expensive, time-consuming, and even result in the loss of your business.

Businesses must be organized and maintain comprehensive payroll data and aware of how the possibility of errors affect employees, contractors, and the business.

Below are common payroll errors and the consequences for your business:

Common Payroll Errors

Common Payroll Errors and Their Consequences

Misclassifying Employees

Employees who are incorrectly classified may get erroneous compensation, which might result in either an excess or nonpayment of wages. Employers may also be intentionally avoiding providing benefits like health insurance and paid time off while misclassifying employees.

If employers misclassify employees, they may be violating wage, tax, and employment eligibility laws. Organizations can be held liable for these wrong practices.

Consequences

Categorizing an employee or contractor incorrectly is a violation of the FLSA and can result in the IRS taking action against you.

As an example, if you incorrectly categorize an employee as non-exempt, you may be subjected to a penalty of 100% unpaid overtime amount of the employee.

These are the possible penalties that you may be subjected to:

  • A 1.5% penalty on all wages paid to the employee.
  • A $50 fine if you fail to file Form W-2.
  • 40% of employee FICA taxes.
  • 100% of employer FICA taxes.

If such misclassification is done on purpose, then you may be subjected to a 20% penalty of all wages paid to the employee, 100% of employee and employer FICA taxes, and criminal penalties of up to $1,000 or one year in prison.

This is just one example. If you intentionally misclassify an employee as an independent contractor (or vice versa) you can be subject to further fines and litigation.

Talk with an experienced accountant today to reduce the possibility of the penalty.

Filing employment Taxes Late

If you are a business owner, it is observed that you may delay the processes of filing taxes while dealing with the taxation legalities.

Federal tax returns and FICA tax returns, both from the employer and worker side, need to be deposited by employers on a regular basis. But, what if you don’t make these filings on time/

Consequences

If you don’t make these payments on time, you risk incurring a significant amount of payroll tax fines that may rise in proportion with time.

It’s crucial to be completely aware of the payroll tax deadlines if you want to prevent incurring fines for late filing.

The penalty may imply up to 15% of taxes due for deposits. However, it is also important that different tax deadlines may have different penalties. Some of them may ask you to face criminal charges as well.

To prevent fines, subtract TDS from employee wages each month and pay taxation on schedule.

If you have missed a tax deadline, talk with our experienced CPA to reduce the chance of a penalty.

Miscalculating Overtime Wages

Paying overtime wages is NOT as simple as you think. Once you pay an overtime wage, you may be subjected to a lot of other taxation processes as well

For any hours worked above 40 hours in a week, the FLSA mandates that businesses pay their staff 1.5 times their usual rate of pay.

Furthermore, each state may have distinct regulations. Certain localities can have overtime pay regulations that are different from those set out by the federal government.

So, what if you miscalculate or don’t pay overtime wages?

Consequences

If you miscalculate overtime wages, then a hefty amount of penalties may imply to you. These amounts vary based on the error you may have incurred. Contact your CPA in such cases to know about the legalities and avoid unnecessary penalties

Paying Incorrect Amounts

To preserve a good relationship and prevent lawsuits, it’s important to correct mistakes right away if you discover that you have underpaid or overpaid a worker.

In addition to this, you may face legal charges for wrongly paying your employees. The anomaly happens while maintaining data incorrectly and the issue follows.

In such cases, it is always advisable to keep active records of all the amounts that you have distributed to your employees. You may go back and audit the payroll for future references to make corrections.

Consequences

The penalty for paying your employee incorrectly is that you must pay back the whole amount due. In addition to this, you may have to incur civil penalties of up to $1,000 per violation, and may also be charged for any additional state penalties. You also risk losing the employee’s trust and willingness to continue working with you, and open yourself up to civil suits.

Not Complying with the State Regulation

In addition to federal laws, the U.S. taxation system asks businesses to comply with state regulations as well.

While maintaining your payroll, you must follow the regulations implemented by your state as well. You also need to keep yourself updated on these laws since they may be subjected to change at any moment.

Consequences

Each state has different laws and regulations, so the penalties vary. We’d recommend talking with an experienced accountant in your area to understand the legalities of the state in which your business operates.

Not Maintaining Organized Data

The FLSA (Fair Labor Standards Act) mandates all employers to maintain three years of pay records. These records may include the number of hours employees worked, employees’ payment rates, employees’ payroll dates, and the list goes on.

Since some states require data that goes beyond three years as well, it’s crucial to understand your local laws as well while maintaining such records.

The IRS mandates that you maintain records for every employee, including copies of W-4 tax withholding forms and details like the amounts and dates of all wages. In addition, the FLSA requires that you retain even more thorough information for all nonexempt employees.

Consequences

You may be subjected to substantial fines for failing to keep accurate employee and payroll records. It is also important to note that the IRS fined businesses a total of $13.7 billion in 2019 for violating payroll tax requirements.

Not Reporting the Right Tax Forms

Since different practices in the payroll may involve a range of different taxation practices to follow, you may need to submit a range of taxation forms while understanding the legalities.

For example, employees must receive all required tax forms from their employers. W-2 forms are required for employees and for independent contractors who made $600 or more. The tax rates in your payroll should be adjusted since they are subjected to change.

You must disclose various types of taxable remuneration to the IRS in addition to reporting employee pay that may include stock options, equity, and employee benefits like gift cards etc, along with salary, overtime, commissions, and bonuses.

Consequences

Reporting your taxation forms wrongly means missing the taxation process that may subject you to involve in monetary and criminal penalties as well.

Moreover, it is inconvenient for employees if they don’t report the right tax forms. Furthermore, it can also cause problems for your business if the correct paperwork isn’t delivered to the right individuals in a timely manner.

If you are struggling to find the right tax forms, a quick consultation with an experienced CPA can help you get through.

Implying Wrong Payroll Frequency

A pay frequency is something you decide when you hire staff. These options may include weekly, bimonthly, semimonthly, or monthly payments.

The frequency of employee payments is not regulated by the federal government. You might, however, be subject to state pay frequency requirements. 

It is mandatory for a business to comply with the regulations mentioned by their respective state and then strategize the frequency of payment. Since each state has different rules, it is highly recommended to talk with a trusted accountant while implying payroll frequencies.

Consequences

Your company may incur penalties or fines because of an inappropriate payroll frequency. The business is responsible for paying its staff on schedule. Employees may stop trusting you if you don’t adhere to a strict pay frequency.

How to Fix Payroll Error?

Businesses can fix payroll errors by being very diligent. Here are some ways to fix payroll errors:

  • If you have incurred an error, then payroll should be canceled, corrected, and processed again for the impacted employee or employees. 
  • You should send a letter to the impacted employees with the details of the payroll process on an ongoing basis.
  • You should be informed on how to classify employees under the state’s regulations, and be aware of any penalties this mistake put you at risk for.
  • Automate your payroll process for efficiency and productivity.
  • Audit your reports on a monthly basis to reduce the possibility of error.
  • Document all the payroll sheets to file taxes efficiently with your CPA.
  • Follow your state payroll frequency strictly on a regular basis.

Even one mistake is an indication that you should change your payroll process. For many, that means working with a CPA who offers payroll and accounting services to ensure proper due diligence. This also can build back trust with employees, as it indicates you take payroll and errors surrounding their livelihood seriously.

Conclusion

Mistakes may occasionally occur while incurring payroll slips but there are preventive measures you can take to reduce and even completely avoid some of the most typical payroll mistakes.

A wonderful strategy to surpass employee expectations and increase their faith in the company is to follow proactive measures and stay ahead of deadlines.

It can be challenging for many small businesses to stay on top of the evolving regulations and ensure that every area of payroll is handled carefully but with a quick experienced accountant consultation, a payroll without errors can be achievable.

Subscribe to Our Newsletters

Crypto Tax & Accounting Newsletter

*Email

Cross-Border Tax Newsletter

*Email
Sign up for our Newsletter
*Email
Over 100 5 Star Reviews!
AKIF CPA
5.0
Based on 107 reviews
powered by Google
Annie Phillips
Annie Phillips
12:35 10 Oct 21
Turn around time was amazing on the project I needed done. When you don’t understand all the different forms... communication is key and you will get that here. They are there to explain what and why you need it.read more
Meru Kapadia
Meru Kapadia
23:33 01 Oct 21
I usually don't write reviews much as everyone has different experiences, but definitely wanted to share the positive... experience I have had here and why I would recommend them to all my family, friends and co-workers.I got a referral for here from a friend, so thought of giving them a try over my old CPA firm. I have been going here for a couple years now and have to say they are top notch. They are always responsive and willing to work with me even when I am delayed. I generally like to ask a lot of questions and not once did I feel like they were annoyed by it and would very thoroughly and positively answer all my concerns with detail explanations. Even during the pandemic, they worked with me 100% virtual and it was seamless. Overall, I am very happy with this firm and will continue with them for the foreseeable future.read more
Kevan Shah
Kevan Shah
21:45 01 Oct 21
I’ve been going to them for 3 years now for multiple of my businesses. I changed to them after I had problems with my... previous CPA firm and I’m so glad I did! Best decision I ever made for my businesses. They have saved me thousands of dollars over the years as well as deal with my immensely complicated tax filling issues. No matter when I call, they always help answer all my questions (and trust me I have a lot) and put my mind at ease on all my concerns. I feel as if I am family the way they take care of me. The quality of their work has not changed; very consistent and professional. It is an understatement when I say I highly recommend them.read more
Maunil Shah
Maunil Shah
16:19 01 Oct 21
AKIF CPA is the best place for your tax needs! Saim has been easily available for my all my questions and concerns. ... Couldn’t ask for a better firm that provides excellent service and a familiarity with their clients. I always recommend family and friends to AKIF CPA!!read more
Shah Hussain
Shah Hussain
03:58 01 Oct 21
Hello AKIF CPA,I wanted to share my experience with you, your team and whomever may be reading this message. My most... humble thanks to you and your team for a being such great part of my success.You have done a fabulous job for us this year, and since you took over our books (during our most devastating times) you have literally taken weight off of our shoulders.Thanks for bringing everything up to date and also providing us with numbers or as you call it consultations, ahead of time so we could seal the holes.Great work!!!Shah H.read more
Sumit Dalwadi
Sumit Dalwadi
04:57 30 Sep 21
The professionals at Akif have been absolutely amazing! Quick to answer all the questions I had and always available... to offer their guidance.read more
Calvin R
Calvin R
20:21 29 Sep 21
I recommend these guys! I will be going back next year. They made everything simple and we understood what was... happening. There we issues with our taxes due to our previous accountant and these guys fixed everything. They answered our questions and service was always with a smile.read more
Ammoria Daniels
Ammoria Daniels
02:11 16 Sep 21
We contacted Akif with an urgent matter regarding corporate taxes. Akif immediately understood what was needed and... within days had everything ready to sign. The level of service we received was amazing and unmatched. Waqar expertise in trucking industry made our situation seamless. His communication was outstanding; I heard from him daily and could have been completed sooner if I was as fast as he was 😃 Highly recommended!read more
Joe Paneitz
Joe Paneitz
18:30 18 Aug 21
What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth.... I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPAread more
Helptest ARCpoint Labs
Helptest ARCpoint Labs
15:02 18 Aug 21
The firm is quick, responsive, and has the latest technological software. Thus far, I have been with them for 3+ years... and will continue to work with them even after relocating. They make it easy even when I'm miles away. Would highly recommend them.read more
Luz Tipaz
Luz Tipaz
16:06 13 Jul 21
Saim and his team are the best CPAs in town. I have been their client for years. All started when I needed help with... company structure with multiple companies and then accounting and Taxes. I have been very happy ever since. Thank you AKIF CPA.read more
Maria perez
Maria perez
18:31 08 Jun 21
Me and my husband have been getting all of our personal Taxes, business Taxes, monthly bookkeeping, accounting and... payroll done with AKIF CPA. Recently, we had more stuff come up and had detailed analysis done on capital gains, single family rentals (SFR) and business disposition. You will only know how great this CPA company is until you have worked with them and given them a chance. Words can’t describe our experience. AKIF CPA gets the job done every time - very reliable, professional and affordable.read more
Afnaan Amin
Afnaan Amin
22:14 02 Jun 21
Very good experience, we had unique situation in regards to cross border income as Canadians currently residing in the... US. Income on both sides of the border through completely different channels. Everything was very easy and completed timely, I also had lots of random questions and Mohammad provided top notch service along the way and even after we finished our taxes!! Highly recommended.read more
Ryan Paton
Ryan Paton
10:56 08 May 21
I moved to the USA from Canada late 2018 as part of a promotion/relocation for work. For my 2019 returns, I used an... accounting firm recommended by the local Canadian social club in my city, which was a terrible experience. They were slow to respond to inquiries and would follow up in piecemeal requests which dragged out my return process over several months, often asking for information I had already provided.For the price I paid, I vowed to find better service. I found Mohammad online and decided to reach out. Mohammad was extremely responsive, took care of my US and Canadian returns as well as my wife's business returns in a timely manner. Overall, it was a very positive experience and I would recommend him to another in my situation.read more
Tuan Vo
Tuan Vo
01:59 20 Apr 21
I relocated to Texas from Alberta, Canada and needed a CPA to help me with my cross-border taxes as I was not happy... with the CPA that I used previously. During my interviewing process to find another CPA, I had good feedback from Mohammad as he was able to answer my questions regarding my unique tax situation with expertise, and importantly to me, in a timely manner. I decided to use his services for the current tax year and I have nothing but compliments for the work Mohammad provided. If you are in need of a professional cross-border CPA, I highly recommend reaching out to Mohammad Akif.read more
See All Reviews
js_loader