Owning a business after being an employee can be very satisfying. You are the captain of the ship and can chart your course without having to answer to anyone else. When you get to the point where you need employees, however, it’s vital to realize that being an employer can be complex when it comes to payroll. To ensure the best chance of success, be sure you avoid prevalent payroll mistakes:
1. Failing to Pay Payroll Taxes
We list this one first because there are major penalties attached. Brand-new small business owners may mistakenly think that failing to pay payroll taxes is akin to not paying personal income taxes. This is a hazardous error.
If you get in a cash pinch, DO NOT delay paying your payroll taxes as a stopgap measure.
This is what the Dept. of Justice has to say about withholding payroll taxes (trust fund money) and not turning it over to the IRS:
“An individual’s failure to comply with employment-tax obligations is not simply a civil matter. Employers who view amounts withheld from employee wages as a personal slush fund, treat withheld employment taxes as a loan from the government that can be repaid if and when they see fit, or whose business model is based on a continued failure to pay employment tax, are engaging in criminal conduct and face prosecution, imprisonment, monetary fines and restitution. According to statistics provided by IRS Criminal Investigation, in the 2015 fiscal year, individuals convicted of employment tax crimes were sentenced to an average of 24 months in prison.” https://www.justice.gov/opa/pr/justice-department-reminds-employers-their-employment-tax-responsibilities
2. Inaccurate Time Cards
Manual timekeeping processes that require employees to enter hours on a paper timesheet are exposed to errors that are both intentional and accidental. Employees often record their prescribed starting time even when arriving late and do the opposite when leaving early. Even your most high-principled employee can have trouble accurately recalling hours when filling out a time card several days after the fact. Inaccurate time cards increase costs of labor unnecessarily and burden your HR staff (which may just be you) who have to gather information to correct the time cards.
Paying employees a few minutes here and there for time not worked can really add up. Consider the following example. If you have 25 staff members who estimate their hours with an extra 8 minutes of time each day for which they were not on the job, you will overpay:
3. Misclassifying Employees
It is tempting for an employer to designate an employee as an independent contractor. In most cases, employers are not legally obligated to withhold and pay Social Security, unemployment, and Medicare taxes for money paid to workers classified as independent contractors. Additionally, employee classification a host of other things including benefits eligibility, minimum wage provisions, overtime pay eligibility, and workers’ comp eligibility. Employers who misclassify are at risk of state and federal penalties and should consult the comprehensive DOL guidance on the subject to be safe. The nature of an employer-employee relationship can also evolve over time and alter the classification. It’s critical to review the relationships periodically.
baronHCM serves hundreds of businesses like yours and can help you avoid these common pitfalls. Call us today at 631-266-2500.
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