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
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.
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/
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?
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.
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.
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.
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.
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.
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.
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.