Payroll mistakes can be costly. Laws taking effect this year, including the Paycheck Fairness Act and Working Families Flexibility Act, and initiatives such as the IRS’ National Research Program and OSHA’s recordkeeping National Emphasis Program, can result in fines and penalties for errors or noncompliance. The following tips can help your clients avoid common payroll mistakes:
Apply the latest laws and regulations. Failure to implement federal and state payroll laws can put business owners at risk for over- or underwithholding income tax, underpaying state unemployment taxes, erroneously ceasing child support withholding, or incorrectly calculating fringe benefits.
Don’t miss a deposit deadline. Deposit requirements are based on the total taxes reported on Form 941 from a four-quarter, look-back period. Clients must make all deposits on time to avoid penalties. The cost of outsourcing payroll to protect against this may be less than the penalty for one missed deposit.
Process wage garnishments correctly. Employers are responsible for tracking and prioritizing employee wage attachments (for example, garnishments, levies and child support orders) to ensure that withholding and remittances are deducted correctly. The U.S. Department of Labor provides information on who is covered, recordkeeping and reporting, compliance assistance, and other information at tinyurl.com/yegtz2n.
Don’t put too much reliance on payroll software. Advise clients to periodically audit their payroll process to ensure employee pay and deductions are being entered correctly. Advise clients to download tax tables from the IRS Web site and spot-check employee deductions. IRS Circular E has the latest tables, along with all the rules and guidelines employers must follow, available at tinyurl.com/2lan6.
Classify nonexempt employees correctly. Incorrectly classifying an employee can expose an organization to wage and hour audits, as well as significant penalties and lawsuits. Familiarize your clients with Fair Labor Standards Act guidelines. The DOL explains the difference between exempt and nonexempt employees at tinyurl.com/y8lkcjm.
Don’t treat employees as contract workers. Unless specific conditions are met, your clients may be responsible for reporting and paying employment taxes and possibly be liable for back taxes and penalties for employees who are misclassified as independent contractors. Refer to the IRS definition of contract workers at tinyurl.com/5u0d.
Report fringe benefits. Failing to report these as income when required and underwithholding taxes can lead to significant penalties. The DOL has a handy reference on the rules for all taxable benefits at tinyurl.com/rff63.
Ensure that Social Security numbers are correct on W-2 forms. Encourage clients to use the Social Security Number Verification Service (SSNVS) to check the number and name combination for each new employee or the Department of Homeland Security’s E-Verify program to verify the eligibility of each employee to work in the U.S.
Don’t mishandle withholding for employees who receive third-party sick pay. When a third-party insurance company assumes salary payments to employees on long-term disability, employers often retain responsibility for paying and reporting those employees’ share of Social Security, Medicare and Federal Unemployment Tax Act contributions and must report federal income tax withheld and deposited by the third party. Refer to IRS Publication 15-A at tinyurl.com/d57hqe for rules regarding third-party sick pay reporting.
—By Don McLoughlin, (email@example.com) vice president of marketing at ADP Small Business Services.