People can be forgiving when others make mistakes until it happens with their paycheck. Then there’s little room for error. Not only will you have unhappy employees on your hands, you could find yourself in trouble with the Internal Revenue Service (IRS). It’s better to take the time to learn how to avoid a mistake than to deal with the consequences of it. We discuss some of the most common payroll mistakes below.
Misclassification as an Independent Contractor
A person you hire as a regular employee typically only works for you. He or she works a set number of hours every week based on employment status. Employment is usually at-will, meaning either you or the employee can terminate the business relationship at any time. Your direct employees work under your supervision unless you assign them to another manager.
An independent contractor is usually someone you hire on a project basis. He or she may work for several companies at the same time. Some independent contractors have long-term relationships with their clients, although there usually is no guarantee of ongoing work.
Employers who hire independent contractors don’t have to withhold any payroll taxes. However, they should send a 1099 miscellaneous income statement at year’s end. It is up to the person who performed the services to file his or her own return and arrange for regular tax payments.
Misclassifying someone as an independent contractor makes you liable for un-deposited and under-reported taxes as well as Medicare and social security contributions. It also means a penalty of up to 100 percent of the unpaid taxes and possibly having to pay employee benefits.
Not Filing Payroll Taxes in a Timely Matter
The due date of your payroll tax payments depends on the amount you collect. While monthly payments are most common, you may need to pay bi-weekly or even by the next business day. Cities and states that collect payroll taxes have their own set of deadlines, so make sure you know them. Paying late means paying more than necessary in interest and fines.
It’s also important to register your business with city, state, and federal governments long before your taxes come due for the first time. This ensures you have your tax identification number available when it comes time to submit the payroll taxes.
Under Withholding or Not Matching Required Social Security and Medicare Amounts
As an employer, you must withhold federal tax, state tax, social security, and Medicare contributions. Some companies catch the attention of the IRS by withholding too little in taxes and not matching the employee’s contribution for social security and Medicare. This could subject your business to a fine of 15 percent of the under-deposited and under-withheld amounts. Penalties can reach as high as 100 percent if the IRS deems that your company committed a willful act.
These are just three of the dozens of potential payroll mistakes that could cause lost revenue for your business. As a local Columbia, South Carolina payroll services company, we can take over your payroll functions or instruct you on how to complete them error-free.