It may not be glamorous or exciting, but bookkeeping is the backbone of a successful business. However, it can also be tricky. Businesses both large and small streamline this process through programs like Quickbooks, which is the most popular accounting software in the world. Over 1 million people have used Real World Training to learn how to use Quickbooks. Here are the top five payroll mistakes that we can help you look out for:
Mistake 1: Ignorance of the Law
Payroll and taxes are complicated topics. You, or a delegated employee, will need to stay up to date on current laws and regulations. Software like Quickbooks can guide you through the paperless payroll and tax process so you avoid costly mistakes. It’s also important to update your version of Quickbooks every year. That way you’re using a version that complies with current laws. Meanwhile, make sure that you or whoever is responsible for the company bookkeeping is trained in using the software correctly.
Some employee regulations may trip you up. These can include:
Legally required notices. Stay aware of Occupational Safety and Health Administration, OSHA notification requirements. You also have to post a minimum wage notification in a common area, even if you only have one employee.
Overtime. Laws on overtime vary by state and business, however you will likely be required to pay employees’ overtime hours. You may be able to offer employees comp time or other perks, but first verify with your accountant if that’s legal in your area.
Avoiding Breach of Confidence. If you have a small business without a Human Resources department, you need to be careful not to cause a Breach of Confidence. This may include oversights like:
- Discussing an employee’s pay
- Disclosing the reasons why someone was fired
- Overstepping legal bounds when providing a reference for a previous employee
Mistake 2: Discarding Records and Files
Businesses are legally required to keep meticulous financial records. Be careful what you throw away. If storage space is an issue, having a digital copy of a physical file can save you in the event of an audit. While you’re at it, get used to storing receipts, recording business expenses, and holding onto employee records even if they’re no longer with the company.
Mistake 3: Misclassifying Contractors and Employees
Of course, you don’t want to get into legal trouble by misclassifying someone as a contractor versus an employee. With contractors, you are not responsible for paying items under the Federal Insurance Contributions Act (FICA). FICA includes the money withdrawn from an employee’s paycheck for Medicare and Social Security. You also don’t pay for contractors’ unemployment.
These items can add up to a significant amount, possibly as much as 30%. However, if you incorrectly classify an employee as an independent contractor, you may be hit with steep fines, extra tax scrutiny, and other penalties by the US Government. When in doubt, research or ask a tax expert.
Mistake 4: Missing Important Deadlines
Businesses are faced with so many deadlines that it’s easy to miss something important. Payroll involves many tasks that must be completed from weekly to annually. These include:
- Government tax payments
- Tax forms sent to your employees and various tax authorities
Missing a deadline may have several consequences. If your employees don’t get paid on time, they may alert watchdog agencies or pursue legal action against you. The government also takes a very dim view of these payroll errors.
Mistake 5: Misuse of Exemptions and Contributions
Payroll and tax preparation software is only as good as the data that goes into it. Outdated numbers, claiming exemptions that you don’t qualify for, and other errors can cause a wide range of problems.
Some common stumbling blocks include:
The timing of employees’ health care deductions. Pay close attention to laws and deadlines here. Ask an expert if it should be deducted before or after taxes.
Garnishments. Court-ordered garnishments, including child support, may have tax implications for your business.
Exemptions. To stay in good order with the IRS, make sure you can justify each exemption you take. That means you need to understand the exemption and what it applies to. Research this ahead of time or have a conversation with a tax expert.
Image from https://www.pymnts.com/news/payment-methods/2016/new-york-labor-code-payroll-legislation/