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, (don_mcloughlin@adp.com) vice president of marketing at ADP Small Business Services.
