Avoid Penalties: 3 Common Payroll Mistakes Small Business Owners Make 

We live on a very narrow two-lane road with no shoulders. It is thickly lined on both sides by overarching trees. The weather-worn asphalt has jagged edges, and it abruptly drops off into a foot of gravel and brush that slopes right into the trees. It frequently has potholes large enough to swallow a vehicle. If you hit one, you’ll likely need a front-end alignment or a new tire. I’ve been a witness to the misfortune of distracted drivers who hit the potholes just right and bounce out into the trees.  

Small business owners face a similar challenge when it comes to navigating the complexities of payroll. It’s a narrow road with little margin for error, and mistakes can be costly. Let’s look at three common payroll potholes and how they can be avoided. 

Payroll Mistake 1: Ineffective Onboarding Processes 

Employee onboarding is the first step to building a comprehensive employee record, but it can be tedious and time-consuming. Failure to thoroughly and accurately complete onboarding paperwork in the beginning can leave an employer scrambling for missing information when it’s later needed. Similarly, failure to accurately complete and retain required i-9 forms and documentation can lead to compliance issues, resulting in penalties if audited.

It can be costly for an employee if the W-4 and other tax withholding documents are not completed accurately or if the employer fails to update the information in their payroll tax calculations. Employers need a clear understanding of what documents must be completed in onboarding, when information needs to be updated, and how long records should be retained. There should also be a clear process for employees to update their information when necessary.  

When updates need to be made, the redundancy of entering the same information in multiple places is frustrating. For this reason, having a system that connects onboarding, record maintenance, and employee benefits is ideal. The time spent developing comprehensive and efficient onboarding processes is well invested, but there is no need to reinvent the wheel. There are many helpful tools and software options that can streamline onboarding by providing connectivity, electronic signatures, and digital record storage.

At Whirks, we call this Attract & Hire, and it is an especially popular add-on for businesses that are constantly recruiting and hiring. After all, efficient onboarding processes lead to comprehensive employee records that keep a small business owner on the road to compliance and out of the redundancy pothole. 

Payroll Mistake 2: Incorrect Tax Calculations 

Correctly calculating payroll taxes is crucial to the success of any business, but payroll tax laws are continually changing. Navigating the ever-evolving terrain can be difficult for small business owners. Miscalculations of federal, state, and local taxes can also lead to penalties and fees. In addition, life events can change an employee’s tax status, and failure to update tax documents can result in inaccurate tax withholding. Once again, there should be a clear process for employees to update tax forms when changes are needed. 

Manual calculation of payroll taxes is a daunting tax that most small business owners would rather avoid. At times, it may be necessary to consult an experienced accountant or payroll specialist. There are a variety of payroll software options that can assist with correctly calculating payroll taxes.  A third-party payroll provider can offer solutions to keep small business owners on the narrow road, up to date with changing laws, and out of the tax-penalty pothole.  

Payroll Mistake 3: Misclassifying Employees 

Misclassifying W-2 employees as 1099 contractors is a common mistake for many small business owners. Most of the time the error is unintentional, but a few will use the 1099 contractor classification to avoid paying overtime, Social Security and Medicare taxes, Unemployment, or employee benefits. This is a BIG pothole and can lead to legal issues, costly federal and state audits, penalties, and back taxes. 

Making the distinction can be difficult, but it is critical to get it right when it comes to federal taxes. The worker classification determines how the worker files their tax return, and how the federal income tax, social security, and Medicare taxes are paid. 

So how is the determination made?  The IRS recommends a thorough consideration of factors in 3 categories: behavioral control, financial control, and the relationship of the parties. This is by no means a comprehensive list, but here are a few factors to consider in each of these categories: 

Behavioral control — Measure the extent to which the employer controls when, where, and how the work is completed, the tools and equipment used to complete the job, and where supplies and services are purchased. 

Financial control — Consider whether the employer is in control of the financial aspects of the work. Does the worker have a significant investment in the work? Do they have unreimbursed expenses? Do they have an opportunity for profit and loss? 

Relationship of the parties — Determine what kind of relationship is perceived between the business and the worker. Does the worker receive any benefits, such as insurance, pension, or paid leave? Is there a written contract? 

Remember, if you determine that a worker is a 1099 contractor, be sure to obtain their completed W-9 prior to making payments to them. This information will be needed to accurately complete the 1099, and there are penalties for filing 1099 forms with a missing or incorrect Tax ID number. 

When in doubt, consult your HR team

Whenever you are unsure about how to classify your workers, we encourage you to consult your HR team or an outside HR professional. Whirks provides a variety of HR services and support to help small business owners navigate the curvy roads of payroll and steer clear of the penalty potholes. 

Whether it’s onboarding, payroll taxes, or complicated employee classifications, Whirks is here to help. If you find yourself bouncing around from pothole to pothole, or even worse, stuck in the trees, it may be time to reach out! Contact Whirks today to see how our payroll and HR services can pave the road to success for your small business.