As a major employer, you can’t afford to make costly payroll mistakes. A single tax filing error can result in IRS penalties, costly audits, and countless hours spent trying to fix the problem. It can also lead to employee dissatisfaction and frustration because your workers expect to be paid properly. By learning about the most frequent payroll tax mistakes employers make, you can be proactive and prevent these common pitfalls.

Top 7 Payroll Tax Mistakes Large Employers Make

Each year, employers spend an estimated $119 billion trying to comply with corporate income tax returns. Depreciation schedules and quarterly tax schedules entail an additional $70 billion in costs every year. 

American companies already spend a significant amount on their annual and quarterly tax compliance. Unfortunately, your compliance costs can quickly snowball if you make a few common payroll tax mistakes. The cost of dealing with audits, paying penalties, and fixing mistakes can eat into your bottom line, which is why prevention is so important. 

1. Making Data-Entry Errors

Entering payroll data by hand increases the odds of data-entry mistakes. For example, a single Form I-9 mistake can cost $216 to $2,226 per mistake.

Prevention Technique: Double-Check Everything

When adding new information, you should always double-check what gets entered into the system. Ideally, you should invest in automated systems and integrated software. By doing this, you can ensure that you’re only entering data once, limiting the possibility of new data-entry mistakes. 

2. Forgetting To File Obligatory Tax Forms

As a big business, there are a range of tax forms you need to file. Depending on your business structure, you may need to turn in Form 1120, Form 1120-S, Form 4562 for depreciation, Form 6765 for the Research and Development Credit, Form 941 as your employer’s quarterly federal tax return, or many other business-related tax forms. All of these forms have different due dates and requirements, so it’s easy to forget an important deadline.

Prevention Technique: Track Important Filing Deadlines

To stay on top of key tax forms, write them down in your payroll department’s calendar. You can also outsource your payroll activities to a professional payroll provider so that you have better peace of mind about your tax filings.

3. Setting Up W-4s Incorrectly

When W-4 forms are filled out incorrectly, it can lead to withholding the wrong amount for payroll taxes. In addition to ensuring Form W-4 is filled out appropriately with each new hire, it’s a good idea to have employees review their W-4s each year to make sure there haven’t been any changes.

Prevention Technique: Get Payroll Support With Your Key Tax Documents

Form W-4, Form I-9, and other important documents should only be filled out by trained payroll professionals. If you do make a mistake, it’s important to follow the appropriate procedure for correcting it.

4. Classifying Employees Incorrectly

While an employee receives Form W-2, independent contractors are given Form 1099-MISC at tax time. If you misclassify an employee as an independent contractor, you can end up facing an audit through the Fair Labor Standards Act (FLSA). When someone is an employee, you have to file federal and state income taxes, employee benefits withholdings, and FICA withholding. If you misclassify a worker, you may end up paying back wages, unpaid employee benefits, employee taxes, and hefty penalties.

Prevention Technique: Be Cautious About Who You Classify as an Independent Contractor

When in doubt, classify someone as an employee. You won’t be punished for unnecessarily paying employee taxes and benefits, but you will be penalized for misclassifying legitimate workers as independent contractors. We recommend having a professional FLSA audit done by a third party so that you can be 100% confident that you are correctly classifying your workforce.

5. Not Complying With State and Local Tax Requirements

As a large company, you likely operate in multiple geographic regions. However, each area has its own tax requirements, minimum wages, and regulatory requirements. If you forget to charge local taxes or don’t file your state return, it can cost you.

Prevention Technique: Be Proactive About Tracking Changing Regulations

It pays to be proactive about paying attention to compliance updates. Set a Google Alert for different regions and payroll tax keywords, so you get an update as soon as something changes in your area. You can also reach out to a professional payroll team to get help with compliance updates.

6. Forgetting To Track All Taxable Forms of Compensation

Many companies forget that there are many employee benefits that are considered taxable. Stock options, various types of equity,  and the personal use of a company car must be taxed like actual wages. Similarly, gift cards and other forms of employee rewards must be taxed as well.

Prevention Technique: Report Taxable Compensation

Anytime you give employees anything, it should be reported to your payroll department so that they can determine if it needs to be taxed or not.

7. Processing Payroll Manually 

Despite the prevalence of payroll software and high-tech accounting tools, there are many companies that are still processing their payroll manually. Besides being inefficient, this increases the likelihood of committing an error.

Prevention Technique: Adopt Automated Payroll Systems

Fortunately, there are many automated payroll systems available that you can implement. These systems can spot data-entry errors and improve the efficiency of your payroll processes.

What Are the Most Common Payroll Tax Penalties?

The following are just a few of the penalties that employers can face when it comes to payroll taxes. You are required to pay state and federal taxes, FICA, and federal and state unemployment taxes. If you don’t pay each of these taxes on time, you may face some of the following penalties.

• Trust Fund Recovery Penalty (TFRP)
• Failure to pay 
• Failure to deposit
• Failure to file 
• Penalties for inaccuracies and incorrect information 

Tips for Preventing Costly Payroll Penalties

Whether you’re a multinational corporation, an American-based enterprise, or anything in between, not remembering to file payroll taxes can quickly become costly. To avoid falling afoul of federal, state, and local payroll tax laws, use the following tips. 

• Double-check everything that is entered into your system to avoid manual errors. 
• Regularly review your employee W-4 forms to make sure you’re withholding the correct amount.
• If you use a manual payroll system, it is time to consider switching to automated payroll. Automated programs can improve your accuracy, boost efficiency, and prevent data-entry mistakes.
• To avoid late tax deposits, use the Federal Tax Payment System (EFTPS) and stay on top of your filing schedule.
• Research your state and local payroll tax laws, or contact your state to figure out what your payroll tax obligations are.
• File Form 1099 and W-2 with the IRS by January 31 each year.
• Monitor your deposit schedules to ensure you’re making payments on time. 
• Make sure to amend mistakes in a timely manner. 
• Track ongoing regulatory changes by setting Google Alerts or following payroll industry publications.
• Hire a payroll provider to handle all of the details for you. 

Ensure Your Payroll Taxes Are in Compliance

When it comes to your payroll, you don’t want to mess around. From cybersecurity scammers to IRS tax penalties, there are major pitfalls involved in paying your employees each payday. To ensure your payroll taxes are accurate, you need a professional payroll provider on your side. From FLSA audits to quarterly employee tax payments, we can help with all of your payroll-related needs.

If you’re ready to learn more about avoiding top payroll tax mistakes, reach out to Asure’s team of HR and payroll experts today.