This article will go over 5 common payroll mistakes you can’t afford to make. This is important because implementing solid payroll practices now will save you from costly IRS penalties, lawsuits and back taxes in the future. You have to ensure your company is following all state and federal regulations, even if you hire a third-party service to manage payroll for you. Here are 5 common payroll mistakes you can’t afford to make:
- Mistakenly Classifying A Regular Employee As A Contractor
If you mistakenly misclassify a regular employee as an independent contractor, you will be forced to pay stiff penalties and back taxes to the IRS. This is true because employers are required to pay their portion of Medicare and Social Security payroll taxes on all employee wages, but not on wages paid to contractors. When you enter payroll information into QuickBooks, be sure to properly classify each and every employee. And if you aren’t sure how to classify someone, review the IRS Publication 15-A for clarification.
- Neglecting To Report Gifts And Bonuses As Wages
You are required to report any and all compensation paid to your employees. This includes a holiday cash bonus or a gift card. You will need to add the fair value of the gift or bonus to the total wages listed on your employees’ W-2. Failing to report all wages is against the law and can lead to penalties and back taxes. It is important to note that you don’t have to report items given to your employee for work purposes, such as a new computer or tablet.
- Neglecting To Withhold Wage Garnishments
If you receive a notice of a wage garnishment for one of your employees, you are required by law to comply. You can easily set up a wage garnishment in QuickBooks to be automatically deducted from your employee’s paycheck and sent to a third party. If you have further questions, refer to the U.S. Department of Labor.
- Failing To Collect Contractor Information
All businesses are required to prepare a Form 1099-MISC for any independent contractor they paid $600 or more during the year. You can save yourself a lot of time and headaches by collecting all of your independent contractor’s information initially. An easy way to get all of the information you need is to require all contractors to fill out a W-9 before beginning work.
- Having Sub Standard Data Security
Even small businesses can and should have solid data security standards for their payroll information. Keep all hard copy files in a locked safe or filing cabinet. And always make sure you keep your QuickBooks username and password protected.
You can save yourself a lot of time and money by avoiding these 5 common payroll mistakes you can’t afford to make. For additional tips, be sure to check with your CPA.