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Payroll compliance isn’t a particularly romantic subject, which may be why many small business owners do not know much about it. Unfortunately, ignorance can be costly – according to one ADP white paper, 1 in 3 businesses are penalized due to payroll compliance problems. Keeping track of tax payments, filing deadlines, and forms just wind up being a little too much. Now, there are a lot of ways for payroll to fall into non-compliance, but there are five problems I consistently see in other small businesses.
There are a lot of forms related to payroll – thankfully the IRS lists most of them on one page. But overlooking or forgetting about that paperwork is an easy way to get dinged. It isn’t that hard to look up an EIN and see what hasn’t been sent in. Every business is different, but most will need to ensure that they are filling out and submitting Form 941 every quarter, and 940 annually. You must also make sure to give your staff their W2s by the end of January. Form I-9, which is related to employment eligibility, is also often overlooked. But if there is a dispute, the department of labor will want to see these, so it’s vital you submit them and keep them on hand for all your employees.
The IRS has begun to crack down on employers who wrongfully classify their staff as independent contractors. You can only claim someone as an independent contractor if you solely control the final product of their work, and not the means by which is was made. In other words, if you require your staff to come into the office, they are employees, and it is your job to withhold payroll taxes from their wage.
This may sound silly since common knowledge is that overtime is paid at time-and-a-half. So all you should have to do is multiply the hourly income by 1.5. However overtime isn’t that simple – you actually have to calculate your staff’s regular rate, and use that. That includes any bonus payments, stipends, commissions, and all other forms of compensation, on top of the hourly base pay. Underpaid overtime is one of the most common reasons that employees sue their employer, so you need to make sure you’re calculating it properly.
Automatic electronic payments have made this less of a problem, but it’s still a big one. There are two deposit schedules for payroll tax payments – monthly and semi-weekly. Your schedule depends on how much tax you reported during a look-back period, normally a year. If you reported more than $50,000 you are on a semi-weekly schedule, less and you are on a monthly. Monthly payments are typically due on the 15th, but semi-weekly payment dates float depending on your payday. Be sure to take advantage of the government’s electronic payment system so you can set an automatic payment schedule.
As you’ve probably seen by now, there is a ton of paperwork related to payroll, so it’s very easy to lose important documents. Unfortunately, that could land you in some hot water with the IRS and state tax agencies. Compliance law requires that you keep fairly pristine records on hand. Payroll records need to be maintained for all active employees and for everyone who has left within the last three years. Further, most states also require that records of employment and payroll be kept, sometimes for up to seven years. I-9s, W4s, records of compensation, tax forms and proof of payment – everything needs to be up to date and organized.
The trick to payroll compliance really is to foster good habits. If you handle payroll by yourself, you’re calculating wages and payroll taxes every payday. Just make sure to update your records whenever you send out those checks, and to hold onto copies of all your tax paperwork. Non-compliance seems to go hand-in-hand with procrastination, so prioritize your payroll and reporting requirements. Otherwise, you’ll wind up having to pay penalties on top of everything else.