Managing your payroll can be a major headache. Trying to organize and prepare for paying payroll taxes can be even more of a headache. There are dozens of errors businesses make in their payroll taxes that can be very costly. As a small business, you can’t always afford errors like that. Being aware of the most common payroll tax mistakes small businesses make can help you to avoid them.
Here are 5 of the most common Payroll Tax mistakes we have come across:
1. Misclassifying Who You Hire
The people doing work for your company and getting paid for it are either classified as employees or independent contractors. Typically, independent contractors do not get the benefits employees do. The forms you submit for tax purposes depends on how you classify your workers. Employees get a W-2 form at the end of the year while independent contractors are required to receive the form 1099 if you’ve paid them more than $600 for the year (IRS Regulations).
You also pay different amounts depending on what type of workers you employ. For employees, you must run payroll, submit quarterly payroll tax returns and remit payroll taxes. If you misclassify your employees, you may be held accountable for paying employment taxes, penalties and fees.
2. Failure to Issue Forms
No matter how you classify your workers, typically both W-2 and 1099 forms must be issued by the business to its workers. You are required to send these forms by January 31st of the year following the tax year (IRS Regulations) giving you just one month to take the necessary steps. That means gathering the information needed, filling out the correct forms and sending them to the intended recipients before the deadline so that they themselves can file their taxes accurately.
Failing to provide workers with the correct forms on time can lead to unnecessary penalties and fees. An online payroll platform like Xero Payroll or Gusto Payroll can help you file and issue payroll forms.
3. Messing up W-2 forms
There are numerous ways to make errors on your W-2 forms even if you issue them on time and have your records in order. Mismatching of employees’ names and social security numbers is one of the most common errors. The last thing you want to do is wrongfully send confidential information to people providing services to your business.
One mistake you may not think of is using ink instead of digitally filling out your forms which can be very problematic. For example, writing dollar signs on forms can cause them to be read as eights and certain fonts can cause other mistakes when inputted into government scanners. The easiest way to avoid these mistakes is to hire a small business accountant to ensure your W-2 forms are in order.
4. Missing Tax Deadlines or Payments
As with any taxes, there are serious penalties for missing payment deadlines on your payroll taxes. One of the easiest ways to miss deadlines is to be unorganized and not keep careful track of your records. Oftentimes we find that when businesses have cash flow issues, they still pay their employees paychecks but push the envelope on when they remit the taxes. We have seen businesses get crippled by the IRS penalties for missing payroll tax payments. As with anything, planning is key.
5. Not Keeping Good Records
It can be difficult for small business owners to keep track of all their financial records while running their business. Unfortunately, if you put off getting organized and don’t keep careful track of your records, you’re in for quite a headache when tax season comes around. Poor record keeping can lead not only to difficulty paying taxes on time and correctly, but also to overpayment on taxes.
So, what’s the solution?
Payroll can be one of the biggest burdens when it comes to compliance while running your business. Now that we have covered some common payroll tax mistakes, let’s discuss some methods you can take to stay organized.
Using a software like Xero payroll or Gusto Payroll can be a huge benefit that will help to avoid making the payroll tax mistakes discussed above. The Xero Payroll function is free with your standard Xero subscription and will provide you with a way to stay organized when it comes to filing your payroll taxes.
Have more questions on the most common payroll tax mistakes? We would be happy to talk to you. Reach out to one of our Xero Certified Accountants via the contact page or give us a call at 813-252-0829. We look forward to hearing from you.