3 Common Payroll Issues and How to Avoid Them

The IRS assessed 6.8 million penalties on U.S. business, totaling $4.5 billion in Fiscal Year 2013, according to the 2013 Internal Revenue Service Data Book. Big businesses typically outsource payroll to avoid all the headaches and potential issues that come with it, but before you invest in a third-party company or software, ensure it suits your small- to medium-sized business.

In order to avoid these penalties and problems, be sure to educate yourself. To start with, here are three of the most common payroll errors and solutions for each.

Tax Deposit and Filing Deadlines

There are two schedules for depositing federal payroll taxes depending on your business type: monthly and semi-weekly. This includes employees’ federal income tax withholding as well as company and employee shares of Medicare and Social Security.

Generally, if your payroll tax liability is under $50,000 during the relevant IRS look-back period, deposits must be made by the 15th of the following month. Companies with liability above $50,000 must make semi-weekly deposits. Some companies that meet certain criteria are required to make deposits via the IRS Electronic Federal Tax Payment System (EFTPS). Small businesses with less than $2,500 in quarterly liability can mail payments.

Business owners and accountants should thoroughly review IRS Publication 15 to determine both their look-back periods and payment schedules. Failure to deposit penalties up to 15 percent are assessed for non-adherence to required schedules. Check with your state department of revenue for information on state deposit schedules.

Invoicing 1099 Employees

Workers are either employees or independent contractors in the eyes of the IRS. Employers typically prefer the lower tax liability of 1099 (contracted) employees, but must be careful in how they classify these workers. Tax courts put a lot of emphasis on behavioral and financial control of employees as to whether or not they can be classified as contractors.

For example, the 2007 case of Peno Trucking Inc. vs. IRS was about a company that hired drivers as contractors, but also had significant control over their day-to-day activities. The U.S. Tax Court ruled that because the company dictated when repairs on trucks should be done and directed specific days and hours to work, the drivers were employees and not contractors.

Once contractors are properly and legally classified, the most common issues that cause financial strife to companies are invoicing and payments. Simple jobs with no additional expenses, like freelance writing and general labor, can be paid out with platforms like PayPal. This way, your contracted employees can send you an invoice and be paid easily with just an email address. Or, if you contract out your business services and need to create and keep track of invoices from your clients, use an all-in-one system like Sage One. With this system, you can create quotes and invoices and track unpaid, partially paid, overdue and paid invoices with your clients so you are sure all of your books are up to date. You even can accept payments from PayPal.

Garnishments and Levies

Life happens and the encumbrance is sometimes placed on employers to act as administrators. Whether it’s back child support or court-ordered garnishments, businesses can be burdened with the uncomfortable responsibility of ensuring funds are collected from their employees.

The good news is that Title III of the Consumer Credit Protection Act forbids employers from terminating workers whose wages are subject to garnishment. This way, employees know they are safe with the company, but you are still required by law to oblige the court order.

Always review state law regarding garnishments before issuing any payments. It’s also a good idea to sit down and talk to the worker regarding the order you received. Make certain to answer all interrogatories before the given deadline. Your company could ultimately become liable for the debt if answers are not submitted in a timely fashion.

Business owners are human and payroll errors can happen. Just focus on minimizing the frequency and the severity of the mistakes and remedy them as quickly and efficiently as possible.

 

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