One-in-three employers make payroll mistakes that cost billions of dollars annually. The IRS penalizes businesses for these mistakes, which we’re going to help you prevent – hopefully. Avoiding these issues will help you:
- Keep employees happy – they hate payroll issues
- Reduce the risk of costly IRS penalties
- Avoid potential issues come tax season
A good starting point is to begin with the most common payroll mistakes. Of course, you can outsource payroll processing to us or use a platform like Gusto to help minimize errors and allow you to focus on core business tasks. However, knowing the most common errors and issues can save you a lot of headaches if you’re still handling payroll in-house.
4 Common Payroll Mistakes
1. Using the Incorrect Employee Classification
Between 10% and 30% of employers misclassify their employees. While this percentage may seem “low,” it’s a conservative figure that cheats employees out of:
- Benefits
- Protections
Federal and state governments penalize incorrect classification because it leads to billions in revenue loss.
A major issue is when employers classify an employee as an independent contractor. Independent contractors pay their own taxes and are given a 1099 tax form. Employees are given a W-2, and you’re liable for withholding social security and employment taxes.
Who is considered an independent contractor?
Follow this guide from the IRS to clarify if a worker is an employee or if you’re treating an independent contractor as an employee.
2. Misusing Exempt and Non-Exempt
Exempt or non-exempt? The Fair Labor Standards Act requires that you classify employees properly because if the individual is non-exempt, you’ll need to pay them:
- Minimum wage
- Overtime
If you classify someone as exempt who is not, you risk fines and even regulatory action. The Department of Labor has a great guide on which employees may be classified as exempt or not exempt.
Exemptions are very strict in their classification and may impact:
- Executives
- Administrators
- “Learned” professionals
- Computer employees
- Outside sales specialists
- Highly compensated employees
- Others
Not sure what your employees’ classification should be? Work with an accounting professional to help clarify which employees are exempt or not.
3. Overlooking Remote Employees
Remote employees are still employees – even if they live in other states. Employees working remotely have skyrocketed in recent years, which does complicate taxes and payroll. You’ll need to be sure to properly withhold local and state income taxes.
You’ll also need to be on top of “temporary presence” requirements if employees tend to relocate often.
There’s also the question of what happens if the employee is outside of your healthcare network? You’ll need to work with HR, legal professionals and the tax department so that you never overlook remote employees.
4. Paycheck Errors
Paychecks contain a number of details, including the number of hours worked, pay rate, sick leave, etc. These details can change with each pay period, which greatly increases the risk of error.
Employees will be quick to point out paycheck errors, and making a single mistake on a single paycheck may not be disastrous. But a series of errors on multiple paychecks can be problematic.
One way to avoid this kind of payroll mistake is to outsource this task to an experienced payroll professional.
How to Reduce Payroll Mistakes
Payroll mistakes happen, but there are steps you can take to reduce them. Here’s how:
Create a Payroll Checklist
One way to reduce the risk of errors is to create a payroll checklist. Outline each step in the payroll process to ensure that nothing gets overlooked.
Your team can use this checklist to keep track of their progress and ensure everything is accurate.
Run Reports Before Doing Payroll
Running a few reports before payroll can help you catch errors or potential mistakes early on and prevent them from happening in the first place.
Automate the Process with Tools Like Gusto
Automation is a great way to reduce or eliminate human error. Tools like Gusto can streamline your payroll processes to save time and avoid costly mistakes.
We use Gusto with our clients because it simplifies the process by:
- Filing taxes automatically
- Assisting with compliance
- Calculating and syncing hours, holidays, and PTO with payroll
- And more
Gusto also integrates with a variety of other software applications you may be using in your business to further reduce the risk of errors and save time.
Outsource to a Professional
Let’s face it – payroll is complicated. The more your team grows, the more complicated it gets. Outsourcing to an experienced firm, like Redmond Accounting, will save you time and help prevent costly errors.
We can handle your payroll processing from start to finish, so you can focus on more important things, like growing your business.To learn more about our payroll services or how we can help you with your accounting needs, schedule a consultation now!
