Payroll is an essential part of your business – not just a weekly, bi-weekly, or monthly annoyance. Payroll is the primary way that employees are rewarded for good job performance and retained. If you are issuing late or incorrect paychecks it can lead to dissatisfied, unmotivated workers – or worse. It’s hard to keep good employees when a company gets payroll wrong.
The relationship between employees and employers is highly regulated by the government and many of these regulations involve payroll. There are literally hundreds of things that you have to know, as well as hundreds of mistakes that you can make. As a result, the payroll process is much more complicated than anyone who has never done it can possibly know.
The consequences of some mistakes can be more serious than just your paychecks simply being incorrect. Many mistakes result in getting a very hard time from people you don’t know (and certainly don’t want to know) – the federal and state enforcement types.
Below are 5 of the most common payroll mistakes which happen during the hiring stage.
1. Misclassifying Employees as Independent Contractors –
There is one sure-fire way to avoid having to do payroll—-and that’s not having any employees.
Some small businesses avoid the costs (paying Social Security, Workers’ Compensation, State and Federal Unemployment Insurance, etc.) of having employees by classifying the people who work for them as independent contractors and paying them with Accounts Payable checks. While misclassifying employees as independent contractors will relieve your business of paying certain taxes the mistake is serious and illegal.
2. Incorrect or Missing Forms W-4, I-9, and W-9 –
It seems that every agency requires a form…they don’t necessarily want to see it but, they do expect you to have it completed and on-hand in the event that they do wish to see it during an audit.
For each hired employee you are required to have a completed Federal and State W-4 form. You are required to keep these on file. This information submitted by the employee is what you use to calculate tax withholdings from their paycheck then submitting to them a Form W-2 at the end of the year. Mismatching names and Social Security Numbers is one of the most common W-2 filing errors.
The U.S. Immigration and Naturalization Service (INS) requires a form as well – I-9 – for every employee.
Form W-9 is another very important form that you need to keep on file. It is used in conjunction with monies paid in excess of $600.00 per year to independent contractors for services performed for your company and is to be reported on Form 1099-MISC.
3. Salary or Hourly – Misclassifying a Worker’s Pay Type –
The major question here is whether your employees must be paid overtime or not.
The U.S. Department of Labor enforces the rules created by the Fair Labor Standards Act (FLSA). To make it simple: Salaried employees are “exempt” from overtime rules. “Non-exempt” employees are paid by the hour or by the day and must be paid overtime.
Many small business owners just don’t know the rules. One of the main “tests” to use when deciding which pay type is correct focuses on managing others and the authority to hire, promote, or terminate the employment of others.
Take the time to learn the rules and how to correctly apply them. Don’t ever fall into the notion that your mistakes won’t catch up with you! All it takes is one disgruntled employee calling the Wage & Hour Board and filing a complaint against you – – – to make your life miserable.
4. Misclassifying or Not Documenting an Employee Work or Trade Classification –
I see this happen most often with contractors who perform work on a Prevailing Wage job (Davis-Bacon, certified jobs, etc.) But, really, it applies to every business type – because the Workers Compensation experience rates are based on an employee Work or Trade Classification. If you work on a Prevailing Wage job your employees must be paid a specific rate according to their Work Classification.
The most common mistake I see with contractors who use QuickBooks and work on these types of projects is that they use the canned QuickBooks “hourly rate” payroll item for all employees with the applicable rate of pay for the specific Work Classification. The use of that canned “hourly rate” payroll item does not provide a good means of verifying the Work Classification/pay rate shown in the Wage Decision is indeed being paid. It’s best to create payroll items within QuickBooks for the various Work or Trade Classification that your employees are categorized under, pull those payroll items into their employee record and assign the applicable rate of pay there. Following this procedure, even a QuickBooks Payroll Summary Report will show which employees performed work under each specific Work Classification, for how many hours, and at what rate of pay. Because this information flows from QuickBooks into the certified payroll reports it makes Compliance Reviews far less stressful!
5. Not Displaying Wage Poster, Prevailing Wage Decision, or Notice to Employees –
Wage Posters, Prevailing Wage Decisions, and the Notice to Employees are not artifacts of the Industrial Age or required only in factories.
If you fail to display the Federal and State Wage Posters, are caught and convicted, the penalty for any person who willfully violates any provisions of the FLSA, including the displaying of the posters, may be imposed a fine of not more than $10,000.00 or imprisonment for not more than 6 months, or both. For more information visit www.dol.gov or your local State Department of Labor office or website.