You’re working hard at running your business. You don’t want to have to worry about an expensive payroll error. In fact, 40% of small businesses are fined on average $850 annually for failing to properly pay payroll taxes, this is no small issue.
The following are some of the most common payroll blunders a business owner can do.
You Forget to Pay Taxes Year-Round
Many new entrepreneurs consider business taxes similarly to how they would personal income taxes. In other words, I will pay my taxes at the end of the year (or in April!).
But did you know you’re probably required to pay taxes year-round? Tax payments are governed by the IRS and the respective state authority, and your state will have its own timeline. On top of that, how often you pay taxes is also determined by how often you get paid (monthly, bi-weekly, etc).
Another error is misaligning tax payments to employee’s payrolls. For instance, paying monthly payroll for the majority of your employees, but paying semi-monthly for some. Instead of paying taxes depending on your pay period, you pay monthly taxes for everybody else.
Since you are not matching your taxes according to your pay period, you might be in danger to tax penalties. Keep your business safe by contracting your payroll out to a third party service provider or accountant.
You Misclassify Your Employees and Contractors
You’re just getting your business off the ground and a friend lends a hand with design work. She treats it like a drop-in center at first, but soon your business is booming. She’s now coming more often and accessing the work space you have for her and utilizing a work computer. Is your friend an employee or independent contractor?
It can be very expensive to misclassify your worker in multiple ways. If your contractor is an employee, you may be misreporting payroll taxes. Employees can on average be 25-30% more expensive than contractors.
Also, nearly 30% of workers are wrongly categorized as contractors. The Department of Labor is targeting those employers misclassifying workers as contractors. Here’s a great, quick list to help you determine whether or not your worker is an employee or a contractor.
You Forgot to Keep Important Reports on File
Good reporting allows you to run your business or avoid expensive legal penalties. Legally speaking, you need to keep the following documents on file for payroll:
I-9 Form
All employees are required to complete Form I-9 to establish their eligibility to work in the United States.
You do not need to send it in; but you are required to maintain it on file (either paper or electronic is acceptable) for the duration of the employee’s employment and the longer of 3 years from the date of hire or 1 year from the term date.
You may optionally also check the employee’s work eligibility through e-Verify.
w-4 form
Your employee will also need to complete Form W-4 in order to provide information to their employer about tax withholding (You cannot complete this for them). No one needs to file the W-4 anywhere, but each business must have every employee’s W-4 in its files for at least four years.
Only modern payroll systems like Gusto handle your withholding taxes as you and your worker.
State new hire reporting: You will report your new hires to each state’s department. Generally, you will need to supply the name, address, and social security number of the employee.
Your deadline for reporting this information to the state varies from a few days to 90 days depending on the state. See your local state tax, labor, workforce, etc., website for more information on this. For instance, in California an employee must submits a DE-34. Your payroll service should be able to automate the process of filing documents such as the DE-34 on your behalf.
You’re busy running your business but a tax penalty can really sidetrack your business. For assistance, we encourage you to use a full-service online payroll company.
