Payroll has long been perceived as a chore. Employees need to be paid, necessary government forms have to be filed, and taxes have to be paid promptly. "Many mistakes happen due to the preparer simply not knowing the rules," said Michael Hoffman, CPA, of the New Jersey-based firm of WithumSmith+Brown.
To make payroll just a little less daunting, these 10 tips will help you avoid the 10 most common mistakes.
1. Missed tax deposits and filing deadlines. Michael Alter, president of online payroll provider SurePayroll, said, "Once tax funds have been taken from employees and contributed tax funds from the business, you must know when and how those funds get deposited." A calendar with all deadlines for federal, state, county and municipal tax deposits and filing deadlines for the entire year should be visible at every payroll professionals' desk.
"Missed deadlines for depositing payroll taxes and filing the required reports can result in large penalties for late payment or reporting, as well as time lost working on you business," stated Mindi Rickhoff, owner and manager of operations for O'Fallon, Ill.-based Payroll Central.
2. Inexperienced personnel. Have more than one employee trained to do payroll in case the employee who is primarily responsible is out. Training clients and staff can help discover problems as they appear. Many vendors, such as AccountantsWorld, ADP and Paychex, provide training with CPE credits. In addition, you need to have a manual backup system for handling all payroll functions.
3. Errors in filling out W-2 forms. There are many guidelines to abide by when issuing W-2s. These forms need to issued no later than January 31 and all of the demographic information on the form needs to be correct and complete. "In addition, many companies do not understand or realize that certain deductions do and do not have to be listed on the W-2 and in which box they need to be listed," added Rickhoff.
4. Poor data gathering. Mismatching names and Social Security numbers are so common that the Social Security Administration has established a special verification phone number. Payroll records must represent a chronological history of your clients' employment practices in order to avoid government penalties.
5. Payroll records are not saved properly. Typically, records, including time sheets, cancelled checks, and W-4 forms, need to be held for four to six years. States and specific agencies vary, so be sure to be aware how to save records properly for your clients.
6. Confidentiality is breached. Your system should be designed with confidentiality in mind. InforÂmation should not be disclosed to anyone outside the payroll department, and must be handled in a secure environment.
7. Workers are often misclassified. Since there are a growing number of temporary employees, consultants and other independent contractors, it is essential to properly determine the classifications of everyone working for your clients so you can determine how to report payroll information for tax purposes. "Small businesses may avoid the extra costs of having employees (Social Security, workers' compensation and state unemployment insurance) by classifying workers as independent contractors and paying them with vendor checks. If they are misclassified, businesses may be held liable for employment taxes for that worker," said Sharada Bhansali, executive vice president of Hauppauge, N.Y.-based AccountantsWorld.
8. Mishandled garnishments. Often businesses have to pay money that employees owe to a third party. Rickoff said, "Many companies do not understand the instructions for the garnishments. In some instances, they may ignore the document altogether, which could cause severe penalties and fines." If someone wins a money judgment in court against a worker, they can garnish wages. When handling payroll, wages will be withheld, a check will be written and you will be responsible for sending the payment to the appropriate recipient. "Another problem we've seen is mishandling multiple garnishments. Many do not understand that some types of garnishments take priority over others," she added.
9. Independent contractors do not receive their 1099-MISC by the end of the year. All independent contractors who receive $600 or more in compensation during a given year are supposed to receive a 1099 form by January 31 of the following year. Often your clients will forget to send these out on time.
10. A lack of follow-up with clients. "We hear from many accountants who had been processing payroll for their clients that they thought they agreed to one part of the payroll process when their clients assumed they were taking on another, namely tax deposits and filing," said SurePayroll's Alter. As an accountant, you need to make sure you keep your clients up to date on new laws and procedures that might affect them.
Being aware of these common payroll mistakes can make the tasks of processing and compliance much more efficient and profitable, prevent headaches with federal, state and local agencies, and give you the ability to effortlessly manage payroll for your clients.
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