Payroll is so much more than just making sure your employees receive a paycheck on time. It’s a whole section of human resources that includes time worked, time requested off, tax information and important financial data. This helps determine the overall health of your business.
So, it’s no surprise that payroll is a time-sucking process that is prone to mistakes. Payroll software can help you avoid some of these mistakes, but it’s still on small business owners to make sure everything is synced up and compliant.
Accounting and payroll software company Xero offers some advice on common payroll mistakes to avoid this year.
Get employee classification correct
Your workers are either classified as employees or as independent contractors and it’s very important you get that classification right. The difference is important come tax season.
Contractors receive Form 1099, which very rarely has anything taken out for federal taxes. Employees fill out a W2 and have — typically — money already taken out for taxes.
For employees that were mistakenly classified this past year, you can use the Voluntary Classification Settlement Program. This allows eligible employers to voluntarily reclassify workers as employees and be compliant by paying 10 percent of the tax liability.
Forget to issue 1099s
If you have contractors, or freelancers, doing work for you, it’s important you send them out a 1099 Form come tax season. Even if the person only worked once, it’s always a good idea. The IRS requires you send out a 1099 to any contractor who provides $600 or more in services.
Companies that don’t do this are subject to penalties.
Don’t forget about employee expenses
Some governments need these to be taken into account as taxable benefits. Recent changes in health care law have resulted in the government taxing your employees’ fringe benefits. For the most part, they are included in total gross income.
Not all fringe benefits are taxed, but many are. There are the really small benefits, which is around $75 in benefits, for things like personal use of a photocopier or buying coffee donuts or soft drinks for the office. It’s called De Minimis Fringe Benefits and they typically are overlooked and it’s not a big deal.
Working condition benefits, such as employee lunches, traditional prizes and awards or regular snacks and food provided must be reported as income. Some employers also give away gym memberships or use of a company car. This is all considered income in the eyes of the IRS and must be reported.
Failing to timely deposit withheld taxes
Businesses are required to deposit taxes on at least a monthly basis. And when taxes reach a certain amount, they must be deposited the next business day. Penalties can range from 2- to 15-percent for noncompliance, so make sure to stay on top of it.
The same goes for depositing taxes on stocks and the exercising of stock options.
Be careful on employee travel
For the most part, employee travel isn’t considered taxable income. But sometimes an employee has a long-term travel assignment that requires him or her to work from a site that isn’t the permanent work site for a year. This could be considered part of the employee’s income. Talk with a tax expert on this to make sure.