Small business owners now have many hurdles and issues to overcome on a daily basis. One issue that is often overlooked is payroll compliance. This is an important subject and can be very costly to the business owner if ignored or not done properly.
Below are five common payroll compliance mistakes that many small business owners make.
It is important to properly classify the people that work for you. They would be classified as employees if you require them to come to the office.You withhold payroll taxes from their wages or provide benefits to them. Independent contractors provide goods or services to another entity or business with terms either verbally agreed to or specified in a contract. Independent contractors are responsible for any payroll or income related taxes due to government agencies.
One of the top reasons employees sue their employers is over the issue of overtime. Most people are aware that overtime pay is time and a half of the normal rate of pay. However, it can be somewhat complicated to calculate that normal rate of pay if a person is not working on a straight amount by the hour basis. If commissions, bonuses, or other forms of compensation are applicable, the regular rate of pay can be a bit tricky to calculate.
Timely Tax Payments
Your payroll tax schedule depends on the amount of taxes due to the IRS. Payments are made either semi-weekly or monthly depending on a 12 month “look back” period. The total payroll tax liability is the Medicare and Social Security taxes combined. New employers or those with tax liabilities under $50,000 are monthly depositors. If the total payroll taxes are above $50,000, the deposits would be made on a semi-weekly basis. Payments are now automated via EFTPS (Electronic Federal Tax Payment System). Missing a tax payment to the IRS or state can result in costly penalties to the employer.
Payroll can be paper and records intensively. Being compliant requires good record keeping, especially for important documents. Records related to payroll need to be kept for a minimum of 3 years for active and terminated employees. Some states will even require certain records be kept for up to 7 years. The key is to keep updated records, receipts, and maintain copies of these records for the required amount of time.
Payroll has several specific forms that need to be filed monthly, quarterly, or annually. W2s must be provided to employees by the end of January each year. Form 940 is also a required annual form. Form 941 is to be filed on a quarterly basis. Compliance in this area is very important. Any missed filings of these documents can result in additional costs or penalties to the employer.