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Top Payroll and Payroll Tax Mistakes and How to Avoid Making Them

State Taxes, Hiring Forms, Record Keeping,


Payroll processing and payroll taxes are complex subjects and the laws keep changing. If you make a mistake, there are fines and penalties involved. Being aware of the mistakes can help you take steps to correct your payroll processes and keep your company out of trouble.

1. Forgetting about state payroll taxes. All U.S. states have some form of payroll taxes. Most states have state income taxes, unemployment taxes, and some form of workers compensation.

What to do: If your state has income taxes, you must get a W-4 (or equivalent) from employees, then you must withhold income taxes from employees and pay them to the state, in the same manner as federal taxes. Check with your state's revenue department to learn the process. Check with your state's employment or labor department about unemployment taxes and worker's compensation. Read more about state payroll taxes

2. Failing to get a W-4 Form from each employee at hire. Federal law requires that every employee complete a W-4 form at hire to show the amount to be withheld from employee pay for federal income taxes. A W-4 form is required to be on completed by each employee before the first paycheck is written.

What to do: Get copies of W-4 forms, and include this form in your hiring process. Keep completed forms on file in each employee's payroll file in case of audit. Learn more about all the forms you must have employees complete at hire.

3. Failing to verify employee eligibility.Federal law requires that employers verify that all workers are eligible to work in the U.S.

What to do:Use Form I-9 to have each worker provide documents to verify his or her eligibility, then you must attest to those documents. You may also use the E-verify system, which verifies eligibility through a federal data base. Some states require use of E-verify. Read more about verifying employee eligibility.

4. Not making timely payroll tax payments. Employers must make payments on payroll taxes collected from employees for federal income taxes and for the employee and employer portions of FICA taxes (Social Security/Medicare). The timing of payments depends on size of payroll.

What to do You will need to decide which deposit schedule applies to your company. Businesses with many employees use a semi-weekly deposit schedule, while smaller employers use a monthly deposit schedule. Read more about when to make payroll tax deposits. If you haven't already done so, you must register for EFTPS, the federal payroll tax deposit system.

5. Not filing payroll tax reports when required. All employers must make quatrterly reports to the IRS on Form 941. This report includes information on amounts withheld from employee pay for federal income taxes and amounts due for employee and employer portions of FICA taxes.

What to do. Get copies of Form 941 and learn the details of how and when to file this form.

6. Forgetting about Unemployment Taxes.In addition to income taxes and FICA taxes, all employers must report and pay federal unemployment taxes.

What to do Read more about when to pay and report unemployment taxes.

7. Not keeping adequate payroll records for employees.Several federal and state agencies may audit your payroll records without notice, so keeping good payroll records is important to avoid fines and penalties.

What to do Read more about payroll payroll record keeping requirements and set up a payroll processing system that includes excellent records for each employee.

8. Mis-classifying workers as independent contractors.A common mistake made by employers is to classify workers as independent contractors rather than employees. Since there are no payroll taxes due by the employer of an independent contractor, this seems the easiest solution, but the IRS assumes that a worker unless the company can prove independent contractor status. Mis-classification can mean fines and penalties, as well as back taxes.

What to do Learn about the factors the IRS looks at in determining worker status. If you aren't sure about a worker's status, you can file Form SS-8 to get a determination from the IRS.

9. Failing to provide year-end tax summaries to employees, independent contractors, and the federal government. Every year, employers must provide form W-2 to employees and Form 1099-MISC to independent contractors by the end of January, and they must provide summary documents (along with all individual forms) to the Social Security Administration.

What to do. Read more about preparing and submitting W-2s and 1099s.

10. Trying to do all payroll and payroll tax tasks yourself. Even if you have only one or two employees, you may find yourself mired in details and missing important deadlines and payments.

What to do. First, use my free online payroll tax course to refresh your memory or learn the details of payroll and payroll taxes. Then, consider one of these payroll processing options, including a bookkeeper or an online payroll service.

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