Too many honest small businesses are penalized for infractions they never knew they committed to begin with. Tax codes are full of asterisks, small print and details most people are simply not trained to navigate alongside the usual responsibilities of managing a business. A CEO’s first priority (next to running a company smoothly) is the customer. Customer relationships are time-consuming and demand a great deal of attention from a successful management team. With so much happening behind the scenes, it’s no wonder these costly payroll mistakes slip by unnoticed.
Listing employees as “independent contractors” might seem like a harmless mistake, but just two months ago it cost shipping giant FedEx $228 million. Labeling employees as contractors instead of keeping them under the company’s umbrella of employees makes it look as though businesses are trying to get out of covering benefits. This classification error also impacts tax withholding, which means the IRS will almost certainly find out – and they will not let your company off easy.
Failure to Distribute Form 1099s
When businesses of any size receive services equal to or in excess of $600, a Form 1099 must be given to that vendor or independent contractor. Some corporations are exempt from this rule, but it is important to research your company’s status before assuming these forms are not necessary. Failure to provide Form 1099s means your business will be subject to stiff fines and penalties.
Incorrect Overtime Calculations
Payroll is delivered based on a set pay period, so it seems only natural that overtime would be calculated within those same confines, right? Wrong. Overtime is calculated on a weekly basis and cannot be lumped together with the rest of an employee’s pay.
Not Reporting Awards
Gift cards, bonuses, prizes, and awards of a monetary nature are taxable income to the federal government. The only exception to this rule is if an item is de minimis, or too small to even be considered. Use your judgement wisely; however, anything that represents a cash value should be reported as income.
Forgetting Travel Reimbursements
Travel expenses are tricky enough when it comes to reporting and reimbursement. Usually, travel and commuting expenses are not considered taxable income. In the event that an employee’s assignment lasts a year or longer, however, things get complicated. Companies can also find themselves in a precarious situation is the employee in question travels to a permanent work location outside his or her state of residence.
Failure to Update SUI Rates
Every business has a State Unemployment Insurance (SUI) rate that must be taken into account for payroll to run correctly. This SUI rate will change periodically as mandated by the state. If these changes are not reflected in a business’ financial dealings and payroll, the IRS will levy a fine.
Forgetting About Paper Checks
With direct deposit, online banking and automated time clock systems, everything seems to happen electronically these days! Technology has tried to simplify finances, but it is actually that much easier to forget about paper checks and cash when they are used. Document everything as soon as it reaches your hands and keep records of all cash flow, taking special care of the monetary values that are not automatically listed in a database.
While companies never set out to intentionally break the law, many miss small details in tax code that end up costing the business a great deal of money in the long run. Stop the problem before it has even begun by identifying potential problems in your company’s payroll services and correcting them. Professional payroll companies like Padgett Payroll Services® can take this burden off the hands of management, leaving the most important workers in your business free to care for the most important clients. Contact us today to learn more.