In a typical year, the federal government brings in around $1.3 trillion in payroll taxes. These taxes make up 32.5% of federal revenue. As a corporation, you play a key role in making sure these funds reach the federal government throughout the year.
Unfortunately, calculating and withholding payroll taxes isn’t always easy. If you make one of the most common payroll tax errors, it can end up costing your business significantly.
Read on to learn more about the most common mistakes, how these errors cost your business, and what you can do to prevent them.
How Can Payroll Tax Errors Cost Your Business?
State, local, and federal laws are constantly evolving, which makes staying on top of payroll compliance especially challenging for businesses. If you miss a regulatory update, it can result in penalties, increased labor costs, and potential audits. By avoiding the most frequent payroll tax errors, you can prevent the following consequences.
Penalties and Interest
The IRS, federal agencies, the state government, and local municipalities can charge penalties for filing late or paying the wrong tax amount. Additionally, if you haven’t paid your payroll taxes on time, you may be charged interest for making late payments. You can get fines for not paying FICA taxes or be charged a percentage of the misclassified employee’s wages. If you don’t submit important tax forms, you may also be penalized.
Back Employment Taxes
Once you realize that your payroll taxes weren’t calculated or submitted properly, you’ll have to pay them. Depending on how long the problem has existed, this can work out to a significant amount.
Added Labor Costs
Eventually, you’ll need to fix the underlying error. Depending on the mistake involved, this can entail hefty labor costs.
Audits and Legal Repercussions
Some payroll tax errors can lead to state and federal audits. While the IRS is famous for performing audits, you can also be audited by the Department of Labor if you misclassify a worker under the Fair Labor Standards Act (FLSA).
Damage to Your Reputation
Payroll mistakes can quickly become public knowledge. This can damage your reputation among potential applicants, customers, vendors, and everyone your corporation interacts with each day.
Employee Satisfaction
The three biggest drivers of employee satisfaction are the respectful treatment of employees, compensation, and benefits. Payroll tax errors directly impact the employee’s ability to be compensated correctly, which can lead to dissatisfaction.
Loss of Business License
In many states, you’re required to be in good tax standing to keep your license. If you have unpaid payroll taxes and don’t remedy the problem in a timely way, it could eventually lead to getting your business license revoked.
Major Payroll Tax Errors and How To Prevent Them
Even when businesses have years of experience handling their payroll, mistakes can still happen. To avoid the consequences of payroll errors, there are a few important prevention techniques you should put into place in your payroll department.
1. Missed Deadlines
Payroll Mistake: Different jurisdictions have specific requirements about when documents have to be turned in. A missed deadline can lead to penalties, fines, and extra labor hours spent fixing the mistake.
Prevention Technique: If you use the Electronic Federal Tax Payment System (EFTPS), you can automate and schedule your deposits so that you don’t miss them by accident. To remember all of the different forms and tax documentation you need to file, you can write each due date on your calendar or use Asure’s payroll tax management services.
2. Faulty Recordkeeping
Payroll Mistake: The FLSA requires you to keep three years of non-exempt employee records on file. There are also many IRS and tax records that you have to keep on file for years. Any missing records can leave you vulnerable to an audit.
Prevention Technique: First, make sure you understand how long all records must be kept. Create a digital or physical system for storing records for the correct amount of time. Periodically, you should conduct an internal audit of your recordkeeping practices to make sure that you’ve been storing records properly.
3. Employee Misclassifications
Payroll Mistake: Employees can be classified as overtime exempt or nonexempt. If they are misclassified, you may need to pay back the employment taxes and wages you missed.
Prevention Technique: In addition to conducting an FLSA audit, you can prevent misclassification issues by being cautious about making an employee overtime exempt. You should regularly review your employee classifications and keep accurate payroll records.
4. Not Reporting All Compensation
Payroll Mistake: Fringe benefits, stock, and bonuses must be counted as compensation, but many companies make the mistake of excluding these forms of compensation.
Prevention Technique: Stay up to date on key compliance chances. When in doubt, talk to a payroll expert about whether your company’s benefits count as compensation or not.
5. Ignoring Tax Law Changes
Payroll Mistake: Federal, state, and local laws change all the time, so it’s quite easy to miss out on important updates.
Prevention Technique: Work with a payroll provider to understand how changing regulations affect your business. In particular, pay attention to changes to tax withholding tables to avoid withholding the wrong amount.
Discover the Best Practices for Managing Your Payroll
Whether you’re a multinational corporation or you’ve just expanded into your second state, navigating the intricacies of payroll taxes can be challenging. By working with Asure Software, you can get help with document storage, running FLSA audits, and tracking important tax updates.
To learn more about how to prevent common payroll tax errors, reach out to our team of HR and payroll experts today.