Follow Proper Payroll Procedure or It Could Cost You

October 2019 | Article

Payroll is an essential component of any organization’s monthly to-do list, whether you’re a business, government entity or nonprofit. Without it, well, you wouldn’t have very happy workers. But the importance of payroll goes beyond just ensuring your employees are paid correctly. Proper documentation and withholding practices are essential to the financial well-being of your business or organization.

People and payroll are key metrics to monitor in your business.

Take Pennington County for instance. The county was chosen at random to undergo an IRS examination. The result? Substantial penalties for mishandling payroll taxes. It’s trickier than it first appears. The penalty is a result of a payroll-tax practice officials believed they were doing correctly.

This is just one example of ways that a simple mistake in payroll withholding can cost your organization. Here are a few tips to help protect you from an IRS penalty:

  1. Know about constructive receipt of payment.
    The principle of constructive receipt is determined by when the person who receives the income had control over it. An individual is considered to have control over income when it is credited to the employee.

    In the example above, the individual was receiving 24 paychecks per year. One was a mid-month draw and the other was the payroll salary minus the draw. These employees were receiving paychecks in advance, before the end of the month. This means taxes should have been applied as a semi-monthly payroll.

    The IRS took the stance that the mid-month draw was in fact a paycheck, and it should have had taxes withheld. With this being the determination, taxes were paid late.


  2. Know your tax due date.
    If your company is a semi-weekly depositor based on the IRS rules, you are required to make your tax payments after each payroll. The tax due date is based on the date of the paycheck

    Know your tax due dates
    If you have a check that is dated with a Saturday, Sunday, Monday or Tuesday date, taxes are due Friday.

    If you have a check that is dated with a Wednesday, Thursday or Friday date, taxes are due the following Wednesday.

  3. Understand the impact of late payments.
    The IRS isn’t kidding when it comes to late payments on payroll-tax payments. If your payment is between one and five days late, the IRS charges a penalty of 2%. Deposits made six to 15 days late are charged a 5% penalty. If your payment is more than 16 days late, the IRS will charge a 10% penalty.

    The easiest way to avoid a penalty? Pay your withholding tax on time.

  4. Have another set of eyes review your payroll processes.
    It’s important to understand the ins and outs of payroll and have your payroll processes regularly reviewed (and not just by random IRS examination).

    How your payroll is reviewed is up to you. You can do payroll completely in house. Just make sure you are up to date on every changing regulations and are timely with your reporting requirements. The other option is to outsource your payroll. Reputable payroll agencies take the necessary employment information and use it to file payroll on your behalf, once you’ve approved it. This includes the filing of tax payments and insurances to respective agencies.

    These trained professionals can ensure your processes are set up correctly and your withholding is up to standard. That way you can worry less about potential penalties and more about running your business or entity.

Understand Payroll in Order to Make Informed Decisions
Payroll is a vital part of how your business or government runs. It can also be an incredible blow to the financial side of your organization if not handled correctly. Ensure you have the proper rules and procedures in place for compliance. Taking simple steps up front and asking the necessary questions can help you avoid a painful penalty down the road.

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