Payroll Processing Pitfalls
Posted on June 17th, 2015 Read time: 3 minutes
The following is a guest post from IES’s President, Peter Limone:
When it comes to hiring and paying employees, the road to payday can sometimes be a bumpy one. As President of a company that specializes in helping companies simplify payroll for their contingent hires, I’ve seen firsthand how easy it is for clients to get tripped up on things like employee classification, contract hiring, and tax withholding. Below are some common mistakes employers make when hiring employees and processing their payroll. Are you guilty of any of these?
Exempt or non-exempt?
Many employers I’ve spoken with think only their salaried employees are exempt from overtime pay, but this may not be the case. Hourly employees can be exempt as well, depending on several factors. Employees are classified by the Fair Labor Standards Act as either “exempt” or “non-exempt.” “Exempt” employees do not get overtime, but you must classify them correctly, or your business may incur penalties and lawsuits for back pay.
Misclassifying Employees as Independent Contractors
Workers are classified as either employees (W2s) or independent contractors (1099s); getting this right is imperative. The classification drives how compensation gets reported to the IRS and how the compensation is taxed. It also impacts eligibility for benefits like medical insurance coverage, dental insurance coverage, retirement plan benefits, and much more. Classification also determines if a worker is subject to federal income tax and employment tax withholding. Employers who know they may have made a mistake can become compliant by taking advantage of a Voluntary Classification Settlement Program (VCSP) which allows eligible employers to voluntarily reclassify workers as employees on a prospective basis, and get into compliance by paying a “mea culpa” penalty based on the most recent tax year. While this is a bit of a burden, it certainly beats the alternative: if the misclassification is found during an audit, the penalties can be severe and include payment of back taxes, penalties, and interest, not to mention damage to the company’s reputation if reported in the news.
Failure to Issue 1099s (or simply issuing them late)
1099s must be issued to vendors, including independent contractors, who are paid $600 or more in services. Corporations are not required to be issued 1099s. If a company fails to timely furnish a Form 1099, it can be subject to penalties.
Untimely Deposit of Withheld Taxes
Companies are required to deposit taxes on a monthly or semi-weekly basis until taxes reach certain amounts, in which case the deposit must be the next business day. If a company doesn’t adhere to timely deposit of these taxes, the company may be subject to penalties and interest. Penalties are significant, ranging from 2 to 15 percent depending on how late the deposits were made.
Excluding Expense Reimbursements from Reportable Wages
Expense reimbursements can be excluded from an employee’s wages depending on whether the reimbursement is based on an accountable plan. An accountable plan is one under which expenses are reimbursed only if there is a business connection to the expenditure, if there is an adequate accounting of the expenditure, and if any excess reimbursements are returned to the employer. If expenses are reimbursed under a policy or plan that does not meet these general requirements, they must be included in taxable wages.
Not Including the Appropriate Value of Taxable Fringe Benefits in Employees’ Income
Taxable fringe benefits can include company-provided automobiles, club dues, and housing benefits. Valuing these fringe benefits for income and employment tax reporting and withholding can be complex.
Failure to Update State Unemployment Tax Rates.
States change their State Unemployment Tax Act (SUTA) rates generally each year. Not all states issue these rates at the same time. Also, some states issue rates late and make them retroactive. On occasion, states have been known to change rates mid-year. In addition, each state has its own taxable wage limit and can change that limit along with the rates. If a company’s payroll system is not updated with current rate and taxable wage base, the tax payments to the state will be incorrect. Underpaying can result in penalties, while overpaying simply results in a free loan to the state.
If you think you may be guilty of one or more of the above pitfalls, you’re not alone. According to IRS statistics, approximately 33% of employers make payroll errors costing them billions of dollars annually in penalties. Is your company in compliance?
Related Articles
Posted on June 17th, 2015 Read time: 3 minutes
The following is a guest post from IES’s President, Peter Limone:
When it comes to hiring and paying employees, the road to payday can sometimes be a bumpy one. As President of a company that specializes in helping companies simplify payroll for their contingent hires, I’ve seen firsthand how easy it is for clients to get tripped up on things like employee classification, contract hiring, and tax withholding. Below are some common mistakes employers make when hiring employees and processing their payroll. Are you guilty of any of these?
Exempt or non-exempt?
Many employers I’ve spoken with think only their salaried employees are exempt from overtime pay, but this may not be the case. Hourly employees can be exempt as well, depending on several factors. Employees are classified by the Fair Labor Standards Act as either “exempt” or “non-exempt.” “Exempt” employees do not get overtime, but you must classify them correctly, or your business may incur penalties and lawsuits for back pay.
Misclassifying Employees as Independent Contractors
Workers are classified as either employees (W2s) or independent contractors (1099s); getting this right is imperative. The classification drives how compensation gets reported to the IRS and how the compensation is taxed. It also impacts eligibility for benefits like medical insurance coverage, dental insurance coverage, retirement plan benefits, and much more. Classification also determines if a worker is subject to federal income tax and employment tax withholding. Employers who know they may have made a mistake can become compliant by taking advantage of a Voluntary Classification Settlement Program (VCSP) which allows eligible employers to voluntarily reclassify workers as employees on a prospective basis, and get into compliance by paying a “mea culpa” penalty based on the most recent tax year. While this is a bit of a burden, it certainly beats the alternative: if the misclassification is found during an audit, the penalties can be severe and include payment of back taxes, penalties, and interest, not to mention damage to the company’s reputation if reported in the news.
Failure to Issue 1099s (or simply issuing them late)
1099s must be issued to vendors, including independent contractors, who are paid $600 or more in services. Corporations are not required to be issued 1099s. If a company fails to timely furnish a Form 1099, it can be subject to penalties.
Untimely Deposit of Withheld Taxes
Companies are required to deposit taxes on a monthly or semi-weekly basis until taxes reach certain amounts, in which case the deposit must be the next business day. If a company doesn’t adhere to timely deposit of these taxes, the company may be subject to penalties and interest. Penalties are significant, ranging from 2 to 15 percent depending on how late the deposits were made.
Excluding Expense Reimbursements from Reportable Wages
Expense reimbursements can be excluded from an employee’s wages depending on whether the reimbursement is based on an accountable plan. An accountable plan is one under which expenses are reimbursed only if there is a business connection to the expenditure, if there is an adequate accounting of the expenditure, and if any excess reimbursements are returned to the employer. If expenses are reimbursed under a policy or plan that does not meet these general requirements, they must be included in taxable wages.
Not Including the Appropriate Value of Taxable Fringe Benefits in Employees’ Income
Taxable fringe benefits can include company-provided automobiles, club dues, and housing benefits. Valuing these fringe benefits for income and employment tax reporting and withholding can be complex.
Failure to Update State Unemployment Tax Rates.
States change their State Unemployment Tax Act (SUTA) rates generally each year. Not all states issue these rates at the same time. Also, some states issue rates late and make them retroactive. On occasion, states have been known to change rates mid-year. In addition, each state has its own taxable wage limit and can change that limit along with the rates. If a company’s payroll system is not updated with current rate and taxable wage base, the tax payments to the state will be incorrect. Underpaying can result in penalties, while overpaying simply results in a free loan to the state.
If you think you may be guilty of one or more of the above pitfalls, you’re not alone. According to IRS statistics, approximately 33% of employers make payroll errors costing them billions of dollars annually in penalties. Is your company in compliance?
