There are lots of smaller processes that small businesses depend on, and any type of mistake in these processes can cause the business to eventually fail. One of the most important yet underrated processes in small businesses is their payroll system, and any type of mistakes in this vital process can cost your business heavily.
Even the smallest of payroll mistakes can result in you suffering fines and penalties from the IRS. That is why as a small business owner, you need to spot the most common payroll mistakes that small make and avoid them down the road to avoid any problems. So, here are some of the mistakes that you can keep in your mind.
When you’re looking to make payrolls and pay the taxes on time, then you should know how to properly classify the workers into different categories for tax purposes. When you’re operating a business, you’ll have to separate the full time employees and independent contractors into different classes and treat them differently.
Independent contractors can’t be treated like regular full time employees. You don’t have to withhold the taxes of a contractor, neither you need to pay them minimum wages and overtime pay. On the other hand, if a regular employee is classified as a contractor, you might fail to withhold their taxes, and the government and the employee both might suffer from this mistake.
If you’re caught doing this mistake, then you’ll have to pay the taxes of the employee and employer both by yourself, plus a penalty fee set by the IRS. That is why when you hire a new employee, make sure that their taxes are sorted out before you proceed any further.
Messing Up The Overtime Wages
Overtime wages are altogether different from the regular wages, and they must be calculated and paid after careful calculations. Overpaying the employee on overtime would damage your company directly, while underpaying them might cost you penalties, and you’ll own the employee additional wages.
A simple rule of thumb in the overtime wages calculation formula is that you’ll have to pay the employee 1.5 times their regular hourly pay rate if they work over the 40 hour per week mark. For example, of the hourly of an employee is $20, you’ll have to give them $30 per hour for any overtime. Not following this can cost you a penalty.
Not Following A Specific Frequency In Payroll
This is one of the most detrimental things that you can do to your business. Once the Payroll Calculator is properly implemented in your business, you should follow your regular payroll routine. No following your payroll routine which you decided with your employees and delaying the payroll and payments can cause the trust between the company and employees to break. Additionally, you might face a penalty for not being compliant with the state pay frequency requirements.
Set a specific pay frequency for your employees, set reminders for payroll, correct any errors and never let the pay to be delayed. This od one of the best things that you can do to your employees after they’ve invested most of their lives in building and growing your business bigger and bigger everyday.
Messing Up The Taxes
Like any other laws and regulations, the tax laws and related regulations keep changing constantly. You must keep yourself aware of any changes in the state and federal tax requirements before the tax date arrives every year.
If you miscalculate your payroll and pay the wrong amount of tax, you’ll have to face a penalty from the IRS, additionally, you’ll have to pay the owned amount of tax and the interest rate. The rates you used to pay in the previous year might not be the same now, so, always keep yourself aware.
Taxes can be complicated if you don’t do the calculations right in the beginning of every tax year. Have everything sorted out and know how much money to withhold from each employees to do their taxes seamlessly at the end of every tax year. You’ll have lots of taxes and their respective rates in your mind while making the gross and net income.
- Local income tax
- State unemployment tax
- Medicare tax
- Federal income tax
- Federal unemployment tax
- Social security tax
The rates for all these taxes vary from state to state, so, it is important that you get to know more about the laws that’s affect your business directly, and keep them in eye.