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These Common Payroll Mistakes Could Harm Your Business


Payroll mistakes can occur in any type of business, large or small, and the results may be costly and sometimes against the law, such as in the case of IRS violations. It's no wonder that many business owners are wary of the time-consuming and highly detailed process of running payroll.

If you're responsible for ensuring that your employees are paid correctly, and for complying with payroll tax regulations, here are some of the most common payroll mistakes to avoid:

1. Getting Employee Details Wrong
When information about your workers is inaccurate or out of date, there may be trouble ahead. Always make sure you have the correct data for your employees, such as:

  • Full name
  • Employment start date or termination date
  • Tax file number
  • Date of birth
  • Current address
  • Payroll details, including hourly rate, gross wage, and employment period

2. Running Late When Processing Payroll
With everything a business owner is responsible for, it's understandable that you may occasionally fall behind in paying your employees. But the result may be dissatisfied employees and potentially expensive errors, such as inadvertently overpaying or underpaying workers because you rushed through the payroll process.

Things can get even more complicated when payroll involves a departing employee. In some states, employers are mandated to provide the final payroll in a short period of time, and you can incur penalties if you don't follow through.

3. Misclassifying Employees
The people who work for you fall into one of two categories: "employees" or "contract workers." Some businesses misclassify employees as independent contractors, resulting in the need to pay retroactive payroll taxes. Remember, employees must fill out a Form W-2, so money can be deducted for taxes, while contractors who are paid $600 or more in a year must complete and submit a Form 1099, where they're responsible for federal and state taxes. Getting this critical detail wrong can lead to potential tax penalties.

4. Failing to Maintain Proper Payroll Records
Audits may be triggered by a business owner's lack of accurate payroll records. Generally speaking, it's mandatory to keep these records and related documents (time sheets, copies of Forms W-2, pay stubs, etc.) for four years. Be sure you know which records are required by your state labor office.

5. Filing Payroll Taxes Late
The IRS specifies a due date for depositing payroll taxes. Businesses that can't meet this deadline may face up to a 10 percent failure-to-deposit penalty. Different state and city tax collection regulations also come with deadlines, so it's vital to obtain federal, state and local payroll tax identification numbers (where applicable) in time to pay your taxes.

6. Filling Out Forms Incorrectly
Another common error involves overpaying or underpaying payroll taxes. Before submitting the required forms, check and double-check that your figures are placed in the proper columns, with the right amounts placed on the correct lines and that each line item corresponds with your financial statements and payroll reports. And remember to sign your returns!

For many small businesses, outsourcing payroll has proven to be the answer to their complicated payroll compliance needs. Click for some tips on how to go about selecting a payroll provider that's right for you.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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