Top 10 Payroll Compliance Mistakes
While ignorance is bliss, it won’t help you get out of an employment tax or labor law penalty. We know business owners are juggling a lot of balls and under a great variety of pressures. We compiled this top 10 list to help small business owners understand the most frequent payroll compliance issues they will inadvertently stumble upon.
ASAP’s Top 10 Payroll Compliance Mistakes Small Businesses Need to Understand
1 – Paying Employees Outside of Payroll
What’s the impact? The IRS puts the burden on employers to accurately withhold the proper payroll taxes from payments to employees, so beyond the penalties for late tax payments, headaches surrounding refiling returns, and sending out amended W2’s, you might be on the hook not just for the employer’s tax expense, but also for the employee’s tax portion. This is particularly true if you wait for your CPA to discover incorrect payments while preparing your income tax returns.
Suggestion: Scrutinize every payment to your employees before you sign those checks, create a reimbursement procedure to account for receipts, and review your vendor payment list quarterly to make sure you can account for all payments to employees not issued via payroll.
2 – Overtime Rules & The Work Week
What are the penalties for non-compliance? They can add up quickly, but in short up to $1,100 for each violation plus back pay. If an employee files a claim against you, the agency is obligated to investigate and the burden will be on you to provide payroll records for at least 3 years and time-card records for at least 2 years for all your employees. Keep in mind, a complaint can be filed by any employee current or former for up to two years or longer if the violation was deemed willful.
Suggestion: First, use an automated time keeping software that can auto-calculate the accurate earnings based on your state’s rules. If you don’t use one ASAP’s timekeeping solutions, make sure the one you use is set up correctly for Colorado and/or any state you have employees. Second, make sure you are retaining those records for sufficient amount of time to satisfy the record keeping retention requirements.
3 – Overtime Rules and Salaried Employees
What are the penalties for non-compliance? Same as the penalties for “Overtime Rules & the work week”
Suggestion: Scrutinize your handling of salaried employees and use the FLSA Overtime Security Advisor tool to help insure your employees fit under all, not just some, of the requirements which must be meet to fully comply with the FLSA standards. Review your payroll procedures to make sure you aren’t inadvertently docking time from exempt employees that would potentially jeopardize the classification.
4 – Tipped Employee & Overtime
What are the penalties for non-compliance? Ask any one of these 39 hotels and restaurants in Aspen who were audited by the Department of Labor in 2015.
Suggestion: If you are not a payroll client of ASAP yet, please be careful with this item. Too frequently these days many outsourced payroll providers are really just software providers, and they don’t appear to have the same safe guards or staff eager to help employers monitor for compliance issues. Take a look at your payroll reports and do the math to check their work.
5 – Miss-classification of Employees (EE’s) as 1099 Contractors
How would this impact me? First, the state has made it easier than ever for employees to file a report of misclassification. If you face one of the random UI Audits, you’ll be asked to hand over detailed accounting records for prior years as well as payroll details. The payroll details won’t be your issue, those checks you issued directly from your QuickBooks file is where all the headaches start.
6 – Confusing Pre-Tax versus Post-Tax Deductions
What would be the impact? If your S125 document wasn’t active and you are audited, you could be on the hook for a big number. That is because the IRS could make you re-state those otherwise permissible deductions as post-tax. If you goofed on some other deductions, the cost would be related to going back and restating those items properly thus additional tax, late penalties and re-filing costs.
Suggestion: Failure to re-renew a S125 plan document is easy to miss, so check your records and make sure your document is renewed annually. If you need an S125, let us know we can help you set one up for cheap.
7 – Missing Tax Payment and/or Filing Deadlines
What’s are the penalties? 941 penalties can go up to 15% plus interest, missing a Colorado UITR filing deadline starts at $50 plus interest and Colorado Dept. of Revenue is up to 12%. If you or your bookkeeper falls asleep on these and waits for the 2nd notices to address, the penalties can easily exceed the annual cost of our payroll services.
Suggestion: While ASAP puts our name behind our 100% guarantee on our tax filing and compliance service, the end responsibility for any tax payment or filing issues lies with the employer. Thus even if you are outsourcing your payroll, be attentive. I tell people to go ahead and take the time to set up online access with the Dept. of Revenue, the Dept. of Labor even if you rely on us for tax compliance. It doesn’t hurt to log in every now and again to monitor your accounts directly. Also, the online access will make changing a business address much easier should you ever need it.
8 – New Hire Reporting/Wage Garnishments/Child Support
What’s the impact? This isn’t fun and with the rise in medical bills garnishments numbers are picking up. First, keep in mind the court protects employees from retribution by employers that discriminate against them because of a court order, so keep your cool. Still, employers need to be aware that failure to follow through on one of these orders can leave the employer responsible for any amount that should have been withheld from their pay. And on the first part, the Colorado Dept. of Labor can impose fines for failure to submit newly hired employees to the database.
Suggestion: Try to stay out of the emotional drama best you can, but pay attention. Make sure anyone checking the mail is aware of the issues here and knows to get these items to us fast so we can help you set up and respond properly to the court orders. Oh and by the way, don’t worry behind the scenes we are reporting all your employees to the proper state database.
9 – Employee Work State Issues
What’s the impact? Both from a payroll perspective and from a corporate sales and income side, this can open your company up to additional tax filing hurdles & costs. The additional payroll filings and demands are something ASAP can manage given advance notice and the employer tax expenses won’t change too greatly in most cases. However, there can be many unintended consequences for a business depending on industry and state in terms of corporate income, sales tax, use tax and other miscellaneous rules which vary from state to state.
Suggestion: Before you make the leap to hire an out of state employee, its best to discuss with your tax filer and/or attorney to insure you aren’t opening yourself up to additional issues unnecessarily. We’ve seen California for instance apply some of the strictest rules even in cases of a home based employee.
10 – Health Insurance Premium Reimbursements
What are the penalties for non-compliance? $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.
Suggestion: We are advising employers stay away from heath reimbursements in any form including HRA’s until the courts settle this one with someone else as the guinea pig. If in the past you had supplied some sort of pay to your employees which was earmarked for health premiums, stop the practice. Either go to the ColoradoSHOP exchange and set up a plan for your employees or simply stop, and give your employees a raise of some sort that isn’t ear marked for health insurance premium support.