How to Avoid Common Payroll Tax Mistakes

IMGCAP(1)]Mastering payroll compliance continues to be a challenge that many small business owners struggle to control.

Doing in-house payroll means complying with strict IRS rules and maintaining accurate reporting year-round. It also requires business owners to always keep a keen eye on local, state and federal tax regulations as they change regularly—and often with little notice. Overcoming this challenge presents an opportunity for accountants to enhance their standing as trusted advisers to their clients.

A recent survey from the National Small Business Association found that one-third of the small business owners polled spent more than six hours a month on the administrative aspects of payroll taxes. That amounts to 72 hours a year on payroll tax administration alone, which is nearly two full work weeks.  In the rush to organize and file taxes, it is easy to make mistakes.

Unfortunately, one mistake on a business’s payroll taxes can quickly increase the risk of financial penalties, back taxes and increased IRS scrutiny.

Payroll outsourcing provider Paychex has pinpointed some of the most common payroll tax mistakes that businesses make when they attempt to take on the tax process on their own. Helping business owners become familiar with these mistakes can help them learn how to better protect themselves and their businesses during tax time.

The most common payroll mistakes include:

1. Filing taxes past IRS due dates.
Every business owner knows that the IRS stipulates a due date for depositing taxes. What they may not know is that failure to meet this date may result in up to a 10 percent failure-to-deposit penalty, based on their total payroll tax amount. A late payroll tax return also incurs penalties. For each partial or total month that a return is not filed, businesses can receive a 5 percent failure-to-file penalty. The penalty is based on the unpaid tax bill.

How to avoid: Due to the complexity of the process, business owners should begin preparing early for tax season and watch the timeline closely to ensure they do not wait until the last minute to file.

2. Filling out forms incorrectly.
This may seem like a no-brainer, but correctly completing forms will help a business avoid over- or underpaying payroll taxes. It also helps with reconciling W-2s to year-end tax returns. In the rush to complete forms, many business owners accidentally input their information in the wrong sections.

How to avoid: Before submitting a form, a business should first verify that they are using the most recent version of the document and double-check all of their figures. Plus, always make sure the return is signed before submitting it to avoid any unnecessary delays.

3. Submitting incorrect financial amounts.
If a business submits the wrong amount of payroll tax deposits, the IRS will respond with a financial penalty. This penalty starts accruing on the due date of the payroll taxes, and penalties range from 2 to 10 percent, depending upon how late they are after the due date. However, this penalty will not apply if the failure to submit correct amounts is due to a reasonable cause and not willful neglect. The IRS may also waive the penalty if this is the first penalty the business has received. This one-time abatement is helpful to new employers who inadvertently make an error.

How to avoid: Before submitting, add the columns to verify totals, place amounts on correct lines, and make certain that each line item coincides with financial statements and payroll reports.  A simple double-check can significantly decrease the chances of penalization.

4. Misclassifying employees.
The problem of misclassifying workers is rampant now that the federal government has enacted a new multi-agency misclassification initiative. Business owners are responsible for withholding payroll taxes from statutory employees, those over whom business owners exercise a certain degree of control. Control may include defining their work hours, supplying their equipment and tools necessary to complete the task, determining how work is to be done and deciding what needs to be done. An independent contractor is not subject to employer payroll tax withholding, but making the mistake of misclassifying an employee as an independent contractor can result in back payroll taxes.

How to avoid: Every business owner must take the time to learn and understand the government definitions, in addition to the rules and regulations regarding worker classifications in order to minimize the risk of penalty.

The best way accountants can help businesses avoid these common payroll tax mistakes is to obtain a copy of IRS Publication 15, also known as Circular E, and stay educated on current tax laws and employer requirements. As many employers lack a background in accounting, payroll or income tax, it will benefit them to have you as their trusted advisor, ready to help them save time and eliminate stress.

Mike Trabold is director of compliance at Paychex, Inc.