Payroll is a critical part of your accounting and reporting – especially during year-end. Proper documentation and withholding practices are essential to the overall financial well-being of your organization. It may sound simple, but there is so much more to payroll than simply ensuring your employees are paid correctly. And, unfortunately, there are a lot of things that can easily fall through the cracks when it comes to payroll.
We’ve outlined the 10 most common payroll mistakes we see organizations make (and what they’ll cost you) so you can avoid the time-consuming and costly consequences of payroll issues.
Mistake #1: Errors in an employee’s Social Security number and/or address
An incorrect Social Security number can cause a misapplication of funds for your Social Security amounts. This results in changes to your W-2 and your state unemployment return. An incorrect address will also cause issues for timely timely filing of W2s, especially if you mail them.
- What It Will Cost You
Not only will you have to amend your W-2, but you’ll also have to amend all your state unemployment returns. If you don’t move quickly to correct this information, you’ll face a $50 penalty for each time you provide incorrect information.
Mistake #2: Using nicknames instead of an employee’s full (legal) name
Do you have an Archie Patrick that goes by Pat? Or a Nancy Jane that goes by Janie? It’s important to make sure you use an employee’s full legal name for reporting purposes. The Social Security Administration sends out no-match letters for W-2s if the name on the W-2 does not match the employee’s Social Security card.
- What It Will Cost You
If you get this wrong, you’ll be facing a penalty in the amount of $50 for every form that’s incorrect. In addition, it will cost you valuable time visiting the SSA online portal and submitting the corrected information.
Mistake #3: Not understanding the difference between an employee and an independent contractor
There’s a big difference between W-2 employees and 1099 contractors. Misclassification of employees results in lost benefits for an individual and can cause the individual to pay higher tax for self-employment.
- What It Will Cost You
This is a costly mistake for your company and your employees. Not only will your organization owe back taxes and unemployment taxes, but you’ll also owe any unpaid wages and benefits on top of any state and federal misclassification penalties.
Independent Contractor vs Employee: What is the difference?
We’ve broken down the differences between 1099 contractors and W-2 employees so you don’t make this mistake.
Mistake #4: Not having a plan document in place for pre-tax deductions
Pre-tax deductions, like health insurance or health savings accounts, are a great benefit to employees. Pre-tax benefits offer substantial savings for both participants and employers. However, before you offer this benefit (sometimes called a cafeteria plan), you need to have a plan document in place.
- What It Will Cost You
Not establishing a documented plan will mean that your entire plan will have to be set up as an after-tax plan, which is not beneficial to either the employer or the employee. Failing to maintain compliance can mean both hefty penalties and a devastating loss of savings to both the participant and the employer.
Mistake #5: Not knowing your industry and/or entity setup
Different rules apply to different entities and industries, especially when it comes to filing your payroll returns. For example, agriculture entities file an annual 943 form while construction companies file a quarterly 941 form. The difference also extends into unemployment taxes and how they are applied.
- What It Will Cost You
You will have to spend time filing amended returns and, in some cases, you may end up paying taxes that you’re not actually required to pay.
Mistake #6: Not monitoring Social Security limits
When using an accounting or payroll software, make sure you’re closely monitoring your software updates. If you’re not, you could see an issue where you over/under-withhold from an employee and over/under pay the taxes.
- What It Will Cost You
Not only will you have to take time to amend your payroll returns and W-2 forms, but you will also have to explain the error to your employees. You may also face additional penalties.
Mistake #7: Not paying attention to Form 941
The Schedule B and line 12, or part 2 and line 12, on your Form 941 must always match. It’s important to remember that this is the reporting of the liability of taxes on the check date, not the date on which the tax payment that was made.
- What It Will Cost You
If these two lines do not match, you will receive an IRS notice and may have to pay a penalty. Amending this error will take time, but may result in a reduced penalty.
Mistake #8: Applying tax payments to the wrong quarter
Your check date determines what quarter your tax payment is applied to. If you misapply this payment, you will receive letters from the IRS that show over- or underpayments depending on how the payment was misapplied.
- What It Will Cost You
It depends on how long the payments have been misapplied, but correcting this error will almost certainly cost you a significant amount of paperwork and time.
Take Pennington County for instance. The county was chosen at random to undergo an IRS examination. The result? Substantial penalties ($87,140.63 to be exact) 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.
Employees of Pennington County were receiving 24 paychecks per year— a mid-month draw and a payroll salary minus the draw. Because these employees were receiving paychecks in advance (before the end of the month), 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.
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. 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.
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.
Mistake #9: Recording incorrect information in Box 12
Box 12 reports your deductions. If you put down the wrong code, it will change the amount you can contribute. For example, if you put down a Code D for a 401(k) plan (2023 max for the year $22,500), but you actually have a Simple plan, the amount for reporting is incorrect because a Simple plan is Code S (max for year 2023 $15,500).
- What It Will Cost You
This mistake will cause you to fail any potential upcoming retirement plan audits. You also may have under- or over-withheld retirement from your employees and your employer match, which is going to take time to fix.
Mistake #10: Not reconciling your payroll returns to the W-3
Your federal and state forms should always match your W-3. If this does not happen, you will receive notices to either fix the returns or the W-2s.
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What It Will Cost You
Correcting this error involves completing paperwork for both Federal and State agencies, which can be incredibly time-consuming.
The easiest way to avoid these mistakes? Outsource your payroll.
Payroll is a critical component of your accounting operations. Failing to maintain proper payroll procedures can be time-consuming and costly. The good news is, by taking a more strategic approach to payroll, you can avoid costly mistakes and ensure your payroll is completely timely and accurately.
Some organizations choose to do payroll completely in-house, while others find outsourcing works best. Either way, it is critical that you ensure your organization is up to date on ever-changing regulations and timely with reporting requirements.
The Eide Bailly payroll team has vast expertise in accounting and payroll ensuring you are accurately documenting and reporting on payroll taxes and preparing the necessary forms. Rest assured that your organization will never miss a payroll and the process will be done correctly.
Struggling to ensure that your payroll is always done correctly and on time? We can help.
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