There’s a lot more to payroll management than successfully crunching numbers. Every business will benefit from implementing good payroll management best practices now which could save you from IRS penalties, back taxes, and even lawsuits.
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How to Fix Payroll Handling Mistakes
Even if you have outsourced your payroll to third-party service providers or your own payroll software system, any breaches in regulations and the consequences thereof will fall squarely on your shoulders. Below are five mistakes you want to avoid.
Employee mis classification
The employer is required to pay a given portion of Medicare and Social Security taxes on wages given to employees, but this does not apply for payments to contractors. Any employer who wrongly classifies an employee as a contractor risks huge IRS penalties, in addition to paying the back taxes owed.
The IRS has clearly spelt out in IRS Publication 15-A who qualifies to be called an employee and who a contractor is. For guidance, if you exercise extensive control over when, where and how persons should do their work, you have employees, not contractors.
Excluding gifts and bonuses
Any cash holiday bonuses or gift cards issued to employees form part of taxable income. The employer should add the fair value of all awards, gifts or prizes within all employees’ yearly W-2 under the wages section. Failure to do so is tantamount to paying the employee “under-the-table” wages – a practice likely to rouse the wrath of both your state government and the IRS.
Items that are given to an employee to enable work, such as an office iPad or a new laptop, don’t count as gifts and need not be reported.
Not including garnishments
If you receive a levy, child support notice or any other wage garnishment for any employee, you must comply with it. On receipt of a garnishment, you’re required to withhold the specified amount from the employee’s pay and send it directly to the specified third party.
Many employers decide not to report such garnishments because they are time consuming and often come with a ton of regulations. However, with advanced payroll software like www.1099-ETC Payroll and resource from the U.S. Department of Labour, you will be able to navigate the process much more easily.
Failing to get contractor details upfront
Businesses are obligated to fill out and send Form 1099-MISC annually for all independent contractors that were paid more than $600. Instead of scrambling to do this close to the deadline, collect all necessary information from your independent contractors initially.
One recommended practice for small businesses is to have all their contractors fill out a W-9 form prior to commencing the project. If you cannot get the needed information, you will need to abide by stringent IRS directions and possibly withhold taxes from any future payments to that contractor. Even without all details, Form 1099 must be submitted. Any field you have no information for may be left blank.
Not implementing strong data security measures
While your budget may not allow you to implement the same data protection protocols that large corporations do, you must make every effort to keep your payroll information and records completely secure.
Where you’re using third-party payroll systems, ensure your access information – usernames and passwords – are protected. Physical files should be kept under lock and key. Breaches in your payroll information data stores may lead to grave consequences like identify theft and data breaches, which can be disastrous for you and your employees.
The author is a trained human resource expert with over two decades’ experience in payroll systems and running the www.1099-ETC Payroll software. In addition to hiking and swimming, he likes to share information on payroll management and other aspects of human resource in his spare time. 😀