Payroll is one of the most significant aspects of your reporting and accounting. Therefore, you need to make sure that you don’t make any mistakes with the payroll. However, it is quite often to see how people make mistakes when managing the payroll. That’s why we thought of sharing a list of the common payroll errors that employers make. Upon getting to know about these mistakes, you can prevent them from happening in future.
Mistakes in employee address or social security number
If you enter the employee address or social security number incorrectly, you will be causing a misapplication of funds. This can make changes to the W-2 form as well as the state unemployment return. The incorrect address will not deliver the W2 forms to the employees.
These mistakes will force you to amend the W-2. On top of that, you will also need to make changes to the state unemployment returns. Failing to do this on time will make you end up with spending $50 as a penalty fee on each occasion.
Including the nicknames of employees instead of the legal names
Nicknames are quite popular in workplaces. However, you should never include the nickname of any employee in payroll reporting. Instead, you should use the legal name. The social Security Administration will not have any details about the nicknames. If you report with a nickname, they will send back the W-2 letters stating that there I no match for the name.
In such situations, you will need to correct the mistake. For correcting a mistake, you will have to pay $50. On top of that, you will also have to spend your time to visit the SSA Online Portal and then submit corrected information.
Failing to identify the differences between an independent contractor and employee
The employees are considered under W-2, whereas the contractors are considered under 1099. There is a significant difference in between them. If you fail to identify this difference when reporting, you will be making them lose benefits that they are entitled to. On top of that, you will also have to make them pay higher taxes due to self-employment.
This is one of the most expensive mistakes that you can do. That’s because it will make your company owe back taxes as well as unemployment taxes. On top of that, you will also owe unpaid wages along with benefits. Apart from these, you will have to deal with penalties implemented by the state and federal governments for misclassification. Hence, make sure that you understand the difference between an employee and an independent contractor. Then you can proceed.
Failing to manage pre-tax deductions
Pre-tax deductions such as health savings account and health insurance are offering benefits to employees. This can benefit both employers and participants. However, you need to have the plan document with you before you go ahead and provide this benefit.
If you don’t have a documented plan, the best thing that you can do is to set it up in the form of an after-tax plan. This will not be beneficial for the employee as well as the employer. Unfortunately, failing to maintain such compliance can lead you to loss of saving for both employee and employer. On top of that, you will have to pay hefty penalties as well.
Failing to understand the entity setup or industry
There are different rules applicable for the industries and entities. When you are filing for the payroll returns, you should have this difference in the back of your mind. For example, all businesses in the agricultural sector will need to file annual 943 form. Likewise, the construction businesses will need to file the 941 form. It would determine how the taxes are applied.
If you fail to fill the correct form, you will have to spend more time to fix the mistakes. On top of that, you will end up with paying taxes, which you are not really obliged to pay as well.
Failing to monitor social security limits
When using payroll or accounting software, you need to make sure that you monitor the software updates. If you fail to do this, you will end up with a problem with over withhold or under withhold from an employee. This can make them pay over taxes or under taxes.
This mistake can get you to make amendments to the W-2 forms. On top of that, you will need to reach out to the employees and let them know about the mistake. You may have to deal with additional penalties as well.
Failing to fill the Form 941 correctly
Completing the Form 941 can be quite tricky. You need to make sure that the Part 2 Line 12 or Schedule B Line 12 match with each other. This is where you need to make sure that the check date is not the same as the day where you make the tax payment.
If the two values don’t match, you will get an IRS notice. You may also be asked to pay a penalty. You can reduce the penalty by amending the mistake.
Failing to apply tax payments on the right quarter
The check dates would determine the quarter where your tax payments are applicable to. In case if you misapply this payment, you will end up with receiving a letter form the IRS. It will show your overpayments or underpayments, depending on how you misapplied.
The results of this mistake would vary depending on how long you have bene misapplying the payments. However, amending this mistake will make you to spend a lot of time on paperwork.
Final words
Payroll is one of the most critical aspects of your accounting department. Therefore, you need to make sure that you adhere to correct payroll procedures at all times. The mistakes that you do with it can be expensive and time consuming. This is where you need to follow a more strategic approach to payroll management. Then you can minimize the mistakes effectively.
