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Avoid These Frequent Payroll Mistakes

Oct 22, 2021 | By Isaac O'Bannon | 0 Comments

Topics: Payroll

Doing payroll can be a chore, and has the potential for costly penalties when done improperly. The challenges are greater for some types of businesses than others. For instance, retailers and hospitality businesses often face challenges resulting from larger and revolving staffs, most of whom are hourly and may require tip reporting. Professional services firms such as engineers, architects, law firms, and accounting offices, on the other hand, generally have fewer staff, many of whom are salaried.

However, these firms can still have hourly paraprofessionals or part time staff, as well as contractors, more detailed benefits tracking, and bonuses that may be managed through a payroll or HR application. While most accounting firms have the knowledge to manage their own payroll services, they may not do so if they are not also providing payroll services to their clients. For these firms, as well as other types of professional service entities, the general problem of a payroll system processes is are either managed with a DIY business payroll system, or outsourced to a payroll service provider.

For businesses faced with this decision, I would greatly recommend using a professional payroll service to address payroll system problems. Many local accounting firms offer the service, and it will give you peace of mind that the processes are being done by staff who have years of experience, know the rules, keep up with changing laws, and basically have “seen it all.”

There are several excellent small business-managed payroll systems on the market., however, most Most of these which will integrate with practice management systems like BQE Core to seamlessly transfer data on hours worked, PTO, mileage, expenses, and other associated details. When managing payroll processes for your own business, however, it is essential to avoid these common payroll errors due to their potential cost., and potentially very costly, mistakes.

Don’t Miss Deadlines

Payroll tasks include several deadlines that include not only when you actually process each payroll run, but also when you have to report payroll information and submit withholdings to state and federal tax agencies and the SSA. And don’t forget the annual filing of W-2s and 1099s. Missing any of these deadlines or failing to submit withheld tax funds and employer taxes can result in penalties and interest being owed to the agencies. Willful misreporting can be prosecuted criminally.

In addition to managing and reporting the tax withholdings for employees, businesses are also often required to comply with garnishment orders, as well as other post-tax deductions such as healthcare and retirement contributions. Tight management of these processes and diligence to adhering to deadlines is paramount.

Ensure You Have the Payroll Funds

Payroll funds are often transferred to the payroll account shortly before they are needed. If the account balance is insufficient, it will cause the funds transfer to fail. This can result in not paying your staff on time or even costly bounced checks, both of which are bad for your relationships with your staff and contractors.

Keep Good Records

Payroll problems at work can include timekeeping. Improper timekeeping by staff can lead to them bilking the system. Improper timekeeping by the business can result in charges of wage theft. Therefore, firms that use hourly employees need accurate tracking methods for time and any expenses, including mileage, that employees are reimbursed for.

Misclassifying Employees

There are specific rules when it comes to whether your workers have to be paid overtime or not, and whether individuals should be treated as contractors or employees. The IRS has guidelines, but it mostly boils down to: Can the worker control what they do and when they do it, and who provides their tools. There are additional rules, of course. If a worker is deemed to be a contractor, a form 1099NEC must be reported and provided to the worker at the end of the year if they received $600 or more in compensation. (The NEC version replaced 1099-MISC for most contract workers.) For employees, the business must withhold and remit employee taxes and employer taxes quarterly. Misclassifying workers can result in violations of the Fair Labor Standards Act and penalties and fines: Learn more here.

Multi-State Issues

There are several potential pitfalls here. If you have offices in more than one state, if you have workers that live in a different state than their office, or if you have remote workers, you may need to follow the withholding and income and tax reporting rules for that state. Failure to comply can mean … yes, penalties.

Lax Controls

Businesses that handle manage payroll functions or AP processes in-house may have access to check printing functions, which significantly ups the risk of fraudulent activity. Ensure that only authorized staff have access to any payroll correction or check writing functions, that reconciliations are performed frequently, that spot audits are performed, and that at least two people are involved in any manual payment processes.

These are only a few of the potential challenges that face employers when they choose to manage their own payrolls. While most commercial payroll systems offer good guidance and provide alerts and other reminders of tasks and deadlines, the business is still susceptible to errors made due to lack of experience in payroll management.

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The Author

Isaac O'Bannon

Isaac M. O’Bannon is the managing editor of CPA Practice Advisor and has been advising accounting and technology firms for 20 years.

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