Have you ever read something and found yourself shaking your head in agreement through the entire piece? Well, when I saw a slide presentation from Accounting Today about the payroll errors commonly made by small business owners, I had to agree. I personally have been given these reasons for why some of my clients make the decision to outsource their payroll to The Payroll Department! These are costly mistakes when the IRS or other governmental agency gets involved – I know lots of people who will agree with that. Don’t be caught out!
With no further delay, here are the biggest (and most common) mistakes you can make in your payroll as a small business owner:
- Misclassifying workers There are basically two types of workers in most workplaces: employees or independent contractors. There are very defined guidelines from the IRS to help you get this one right. If you don’t, it can be a big, hairy, costly deal for you. Not only are the forms required from the worker different, so are the benefits, how the compensation is reported to the IRS, as well as the yearend report for the The rules that dictate the status of the worker are different, too. The biggest problem is in the payroll taxes deducted and paid in connection with their employment. Make an error in classifying a worker, and you could be liable for back taxes, fines and penalties. It is not a pretty picture.
- Failing to subject vendor payments to backup withholding I can just hear a lot of entrepreneurs saying, “Huh?” When you issue a payment to a vendor you have to know whether that vendor is subject to backup withholding (rate is 28%). You determine this by first obtaining a Form W-9. If the vendor is a corporation, there is no backup withholding required. However, if no Form W-9 is collected and your small business is audited, the IRS could demand the collection of a failure-to-deposit penalty on the amount that should have been withheld, because you didn’t get the Form W-9 up front.
- You forget to issue Form 1099s Any vendor, including independent contractors, who has provided $600 or more in services must receive a Form 1099 from you. It is not required to send Form 1099 to vendors that are corporations. If 1099s are not sent to the appropriate vendors by the deadline, penalties could be assessed your business.
- Not including fair market value of awards, prizes and gift cards in employee income That’s right. Gift cards are the equivalent of cash and no matter what the amount, should be included in the taxable wages of the Other prizes and awards are considered taxable fringe benefits and therefore, subject to federal income and employment tax withholding. Certain items can be excluded if they are considered de minimis in nature. That does NOT apply to cash or cash equivalents like gift cards.
- Payroll tax deposits are not made on time Payroll tax deposits are generally required to be reported and paid on a monthly or semi-weekly basis. If payments are made late, your small business may be required to pay late deposit penalties and interest on the amounts due. These are not for the faint of heart because penalties can range from 2% to 15%, depending on how tardy the payroll tax deposit payment is made.
The fact of the matter is that making any of these mistakes can be a major drain on you personally and on your business financially. And once business owners learn of the hazards, outsourcing payroll to a professional payroll service like The Payroll Department looks better than ever.
We take great pride in helping small business owners set the routine and processes in place to ensure compliance with all the regulations that go along with having workers and employees on your payroll. We have been told it sure makes it easier to sleep at night!
If you are interested in sleeping better and getting your payroll running smoothly, give Teresa Ray at The Payroll Department a call at (317)852-2568 (Brownsburg) or at (317)800-0191 (Zionsville). They now have two offices to serve you better!
-Elaine of The Payroll Department Blog Team