It warms our cold, little Scorpio Moon hearts to see that you’re interested in payroll tax.
We’re sure you have a lot of Q’s about it, so we’re here with all the A’s. Okay, maybe not ALL the A’s — but we’ve got a list of faux pas that most small business owners make…the ones you shouldn’t be making. Yep, that includes payroll tax mistakes. Payroll taxes are one of those potential disasters you want to avoid like your neighbor with too many thoughts on horchata. Payroll taxes are withheld from an employee’s paycheck by the employer. This money will go to social security, healthcare, and all the other things society needs to function. That’s why it’s important to get it right.
You might be thinking, “but I have a baby biz, I don’t need to worry about payroll.” Negative, Ghost Rider. Here’s why—payroll is essential to raising your baby biz into a grownup biz. You’re bound to need help eventually, whether it’s your newly graduated cousin who’s desperate for a job or a real full-time assistant. Seriously though, there are consequences if your payroll taxes are done incorrectly, and we’re about to dive into that. For now, we’re going to hit you with some payroll taxes inspo.
Payroll Taxes for the Can-Doers
Maybe you can do it all. You can craft a treehouse for the kids, meal-prep for the week, and brew your own kombucha. Maybe you’ve got life handled so you’re planning to DIY your payroll taxes. But let’s not forget a few things about doing it yourself. One thing to be wary about when it comes to DIY is the potential for mistakes. Not to mention the amount of money you might be losing (and no one wants that, amirite?). If payroll is one of your many, many responsibilities, it’s probably time to explore how you can make things simpler. It may not be easy but if you’re in tune with your inner accountant, let’s take a look at some important things to put on your checklist. Your Payroll Tax To-Do List
We’ll keep this tight, because IDK about you but we’ve got a lot of work to get to (ahem, The Bachelor and a face mask). Like most small business owners, you probably haven’t had the luxury to feel “stuck” or “blocked” because it’s do or die. You can’t see us right now, but we’re using air quotes because there’s no right or wrong way to feel. The same goes with payroll — you can’t sleep on it.
Here’s a step-by-step guide to getting your payroll taxes done:
- Have your employees fill out a W-4 to document their filing status and keep track of personal allowances (dependents). If an employee has more allowances, they pay less in payroll taxes.
- Do you have an employer identification number (EIN)? An EIN is the equivalent to an SSN for your business. As lackluster as it sounds, it’s how the IRS keeps track of you. If you don’t have one, get one as soon as possible. You may also need a state EIN number, so keep an eye on your state’s employer resources for those extra details.
- Create a payroll schedule and inform your employees about it. The department of labor requires employers to post certain notices to inform employees of their rights and your responsibilities as an employer. This being one of them. Make sure they know about these important dates: employee pay dates, tax payment due dates, and tax filing deadlines. Think about it as the holy trinity of payroll: paying employees, paying payroll taxes, and filing tax forms. This means you’ll need to track working hours to calculate tax withholdings and pay.
- It’s pay time, which means it’s time to make some calculations. Use the IRS Withholding Calculator to determine how much federal and state tax to withhold from your employees’ pay. Don’t forget to track both the employee and employer portion of taxes as well!
- The moment is here. Drum roll please…Pay the payroll taxes! Make sure you submit your federal, state, and local tax deposits as applicable. And don’t wait until the last minute. Seriously, don’t wait.
- Finally, send in your employer federal, state, or local tax returns as necessary and prepare your annual filings and W-2s for the end of the year.
You probably started your small business on fire, and then you’ve hit some walls along the way—aka a global pandemic that was literally in no one’s business plan. That’s why being super on top of things and organized will prevent you from feeling the pain when things don’t go your way. There’s a lot to do, but it’s all doable. Also, be sure to double-check/triple-check your work before submitting.
Paying for Payroll Mistakes
A little more on unforeseen dilemmas. We’re pretty sure that 0.00% of small business owners foresaw that 2020 would be a wildfire, traumatic, cry-out-loud, laugh-out-loud year—even the psychic ones. Although there is no way to prepare fully, there are always ways to protect your business with the right financial decisions Especially with payroll taxes, because no one wants to say out loud, “The IRS is after me.” *shudder* No one wants to be at odds with the government. It’s okay to make mistakes but remember, not all mistakes are forgiving. So, before we dive into the top 5, it’s important you understand how detrimental a big payroll faux pas can be to your business.
Paying payroll taxes are the responsibility of the employer. If you fail to collect or report payroll taxes, the IRS will assess penalties and interest onto your account, and you will be held liable for failing to withhold employee taxes. There are many requirements to be met and there are just as many penalties if your business fails to do so. For an idea of the specifics, the IRS Publication 15: employer’s Tax Guide lists them out. What does this mean? Simply put, you’ll owe money.
Some of the most common payroll tax penalties include:
- Failure to file Form 941 will result in a 2% penalty if you’re one to five days late, a 5% penalty if you’re six to fifteen days late, a 10% penalty if you’re more than 16 days late, and the maximum penalty is 15%. That’s pretty steep.
- If you fail to provide information returns to employees such as W-2 Forms, you could be subject to penalties depending on the size of your company, type of error, lateness, and if the payment wasn’t made.
- You can receive a trust fund recovery penalty (TFRP) if you fail to pay payroll taxes at the appropriate time. Trust fund taxes are not taxes on trust funds. (Well, they can be, but we’re not talking about those.) They are taxes collected by a business that are held in trust until taxes are paid to the government. For example, employment taxes and sales taxes. Trust fund recovery penalty means unpaid tax. In addition to the penalty, interest accrues from the due date.
Remember, employers must withhold income tax, social security tax, and Medicare tax from worker’s pay. These must be reported and submitted to the IRS. Penalties are assessed from a 2%-100% of unpaid taxes if requirements are not met. And don’t be late with your payment! You will be penalized, and no one wants to give Big Brother more money than they have to.
6 Common Payroll Faux Pas
There’s a lot to get down but it’s a must if you don’t want to end up on the IRS’ naughty list.
Underpaying or Overpaying Payroll
Some common mishaps include underpaying or overpaying employees which may be a human error or glitch in the system. If this is the case, employees have two years to recover any wages lost through underpayment before the statute of limitations is up. Let’s say you overpaid an employee in New York. You can collect overpayment up to five weeks prior to notification and up to six years to do so. Do your due diligence and inform the employee of the error and show proof. You can either have the employee cut a check or deduct the payment their wages. Each state’s laws are different so be sure to check out what the statute of limitations are in yours.
Being Late Gets You IRS Hate
Timing is everything when paying payroll taxes. This requires some serious organization and consistency. Not only will your employees side-eye you on late pay but the late pay penalties can cost your business oodles and oodles of money. Create a timeline so you don’t get caught up in the agony. The IRS lists employment tax due dates, so mark those dates on your calendar. What happens when you do file late? There are exceptions in which the IRS can remove the deposit penalty. According to the IRS, this occurs if the penalty applies to the first required deposits after a retired change to your frequency of deposits or when you file your employment tax returns by the due date.
Misclassified Human Being
Get the classification of your employee right. You wouldn’t want to browse through a science textbook and see some misclassification of rare insect species, so why do that to your beloved employee? This is a huge bummer for everyone. Why? Misclassified employees can be denied access to critical benefits and protections entitled to by law. It also sucks for federal and state governments because it generates substantial loss in the form of lower tax revenue.
Calculation Errors Suck
When running a business, there’s tons to keep track of. Think overtime, commissions, deductions, PTO, and the likes. Sometimes we make mistakes when it comes to payment. When it comes to overtime, employers generally pay 1.5 times an employee’s regular wage if they work over 40 hours a week. Each state may have different policies, so it’s a good idea to check up on them. If you don’t pay overtime to your employees for their extra hours, they can file a complaint with the Department of Labor, and you could face a $1,000 civil penalty. Even if accidental, this issue must be corrected. Schedule accordingly so no one works beyond their shift times and be meticulous about keeping time sheets. If a mistake is made, fix the error and pay your employee promptly. Most companies add the missing pay to the next pay period or cut a check.
In the Right Place
Your super cool minimalist Japanese pottery store has done so well, you now have 5 locations in 2 different states. We see you! Process your payroll in the right state. If your first location is based in Los Angeles, but you have employees working in your Phoenix location, pay according to the state where your employee works. It sounds a bit complicated, doesn’t it? That’s why you should keep accurate payroll records and organize files based on states to prevent wage inaccuracies. For example, states have different minimum wage laws so you may be over or underpaying an employee if you do it on your base location.
Get the Record Straight
Be as thorough as possible. The Fair Labor Standards Act (FLSA) requires employers to keep three years’ worth of pay records. This includes hours worked, payment rates, payroll dates, etc. Some states may want even more! It never hurts to have more information on hand. Since it is a large volume of information, keep it organized. It’ll come in handy in the event of a future audit and allow payroll to run more smoothly. It also ensures you won’t misclassify employees or miscalculate pay.
In conclusion, pay up!
To the IRS and your employees, of course. While these are common payroll mistakes, that doesn’t mean you’ll make them. By being on top of your documents, you do everyone justice and will lead a stress-free life.
Or…let us be your heroes! We’re here to provide guidance on your financial journey after all. Regardless, now that you know what to do (and what not to do), you can go out and conquer the world. *Beams with joy*