When overseeing payroll, small business owners have plenty of tasks to juggle, from following tax and compliance regulations to making sure records are accurate. With the risk of penalties for incorrect tax reports and complaints from employees about problems with their pay, employers should ensure they avoid issues with their payroll management.
Here are five payroll management mistakes small business owners make:
1. Misidentifying Employee Classifications
According to Accounting Today, employers often have issues with classifying employees correctly. Brian Cumberland, managing director with Alvarez & Marsal Taxand, wrote that the compensation for employees and independent contractors are reported differently to the IRS.
Since this is the case depending on the classification of workers, employers must be able to differentiate part-time or full-time employees who receive a Form W-2, from contract staff, who get a Form 1099. For example, if a worker receives benefits like health insurance or has a retirement savings plan through the company, then he or she is most likely an employee.
2. Paying Employees Late
Another mistake business owners may make is not paying employees on time. Late or unpaid wages may make employers liable for employee lawsuits, Society for Human Resource Management warned. Depending on the state laws for worker compensation, employers may have to pay penalties in addition to giving employees their due wages.
3. Not Keeping Track of Employee Reimbursements
Small business owners may have employees travel to conventions or training facilities to improve their skills or industry knowledge, which may require them to reimburse workers for hotel, meals, transportation or other costs. Employers should make sure they are adhering to payroll tax regulations for reimbursements. These include reimbursing expenses that are business-related and having employees track expenses within 60 days of this cost, according to the U.S. Small Business Administration.
4. Having Out of Date Records
To pay employees and account for benefits correctly, employers must have their records up to date. SHRM noted that one of the payroll errors that occur is a problem with vacation accrual. This may be due to a tech error or a communication issue, but if employers do not confirm that a worker is back to work from leave, he or she may not have their vacation accrual numbers right.
5. Failure to Factor in Employee Incentives
Depending on the business, employers may provide different types of compensation, including base salary, bonuses and other incentive compensation. However, not all forms of pay may be properly included in their reports for federal income taxes. Accounting Today stated prizes and awards should be calculated for federal income tax purposes. This is especially true for awards that are treated as cash equivalents, such as gift cards used to motivate or reward employees. Make sure to add gift cards to employees within taxable wages. However, Accounting Today also said that some items do not have to be calculated with wages if they are only worth a very small amount.