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 top 3 most common payroll mistakes which occur at year end.
1. Messing Up Employee W-2’s
This common tax form, required to be filed by employers, suffers from frequent simple errors – which boxes to use – and other more complex errors.
You must deliver a W-2 to every employee by January 31st which shows their total wages and deductions for the prior year.
- You may also need to file this form with other government agencies by deadlines that depend upon your filing method – electronic or paper.
Mismatching names and Social Security numbers is one of the most common W-2 filing errors; this will result in earnings not being properly credited to employees and problems with Social Security payments farther down the road.
- The Social Security Administration runs a toll-free Employee Verification Service where you can verify up to five employee names and Social Security numbers at a time. To use this service, call 1-800-772-6270.
Leaving out other taxable items also happens frequently.
Other problems are easier to avoid:
- Don’t put dollar signs in the boxes – government scanners can often read them as an “8”.
- Don’t use a computer or typewriter font that is too big or too light – try to stick with a 12-point Courier font.
- Try placing the numbers in the center of the boxes.
For more information, contact the Social Security Administration at www.ssa.gov
2. Messing Up Form 1099-MISC
These forms are required for your independent contractors, and the IRS finds that businesses make many mistakes with these forms. You may end up being not only the receiver of a 1099 but the provider of them, as well.
- If your business provides services and is not incorporated, you may receive a Form 1099-MISC from your own clients and/or customers totaling their payments to you for the tax year.
- Regardless of what your business structure is (sole proprietorship, partnership, corporation) you are required to send a Form 1099 to report all payments for services of $600 or more to all of your own independent contractors.
- “Currently” there is no Form 1099 is required for payments to a corporation or for goods.
Form 1099-MISC is due to your independent contractors by January 31st and to the IRS by February 28th and, yes, there are penalties for not sending or filing them on time.
The easiest way to get the information that you need to complete Form 1099 is to send your vendors a Form W-9 (especially if you think you are going to pay them more than $600.00), before paying their first invoice, which requests their name, address, and Tax ID number – either Social Security or Federal Employer ID Number.
Use QuickBooks to it’s full potential. Each vendor record has an “Eligible for 1099” checkbox complete with a spot for their Social Security or Federal Employer ID number. Create a custom field in the vendor record to track whether or not you have a W-9 on file. When entering vendor bills remember to split out costs for goods and services.
3. Failure to Keep Up-to-Date W-4 Information
How long has it been since you last gave an employee a new Form W-4 to complete? Things change – employees get married, divorced, have children – and these changes have an impact on their withholding. At the end of each year (a good time to do this is the 2nd pay period before the end of the year) include new W-4 forms with your employee’s paycheck. Indicate that you need them back by the first of the year if there are any changes.