Seven Tips for Avoiding Costly Payroll Problems
Guest Post By Michael Alter, President of SurePayroll
It’s no secret that small business owners are busy. That’s why payroll and other administrative tasks, though important, are often done quickly or pushed off until the last minute in favor of more pressing items.
Although these tasks often end up on the bottom of a business owner’s to-do list, one misstep in payroll could end up costing you big with fines or even lawsuits.
Here are seven tips for keeping your payroll processing headache-free:
- Obtain a Federal Identification Number (FEIN) from the IRS: All businesses with employees need a Federal Employer Identification Number (also known as a Federal Tax Identification Number) before making their first tax deposit so the IRS can correctly identify you tax account. You can get an EIN quickly by going to the IRS Web site (irs.gov) and applying online or calling the toll-free number listed on the site.
- Correctly Classify Employee and Contractors: Your tax liability can differ greatly depending on how you classify your employees. Business owners are responsible for paying taxes on a regular basis when they hire an employee, but independent contractors are responsible for their own taxes. Also, classifying your employees as exempt or non-exempt is important for avoiding wage and hour suits. Exempt employees are not entitled to overtime pay, while non-exempt employees are.
- Collect the Appropriate Forms from Employees: There are several forms employees must fill out. An I9 verifying their legal eligibility to work in the United States and a W4 that identifies the amounts withheld from their paycheck are the two most important. However, you will also have to find out if the employee qualifies for advanced earned income credits. If they do, they will need to complete an Earned Income Credit Advanced Payment Certificate.
- Become Familiar with IRS Publication 15, Circular E — Employer’s Tax Guide: While drudging through tax materials may not be anyone’s favorite activity, the Employer’s Tax Guide will help you get it right. The guide contains a set of instructions for how to withhold and pay the right amount of federal income, social security and Medicare taxes. It also provides information on wages, other types of compensation and a calendar of tax filing dates.
- Learn about Your State Taxes, Local Taxes and Requirements: Taxes and determining your requirements for state and local taxes can be one of the most complicated payroll taxes since they vary so much from state to state. You can get the most up-to-date information by contacting the government agencies in your area.
- Understand Your State Unemployment Insurance Rate: State Unemployment Insurance, or SUI, works with federal programs to give unemployed workers partial wage replacement. As an employer, you need to pay SUI each pay period. Your SUI rate varies based on the number of unemployment compensation claims you’ve had. Your state will give you your SUI rate annually and when you receive a notice of a new SUI rate, you’ll need to update your payroll.
- Log Employee Hours Appropriately: Failing to pay an employee for time worked, or for overtime worked, is one of the easiest ways to get into trouble. Some payroll companies offer time clock integration that automatically integrates your time clock with your payroll to ensure employees are paid for the exact time they worked. However, if you are logging hours manually, make sure you take extra care to get it right.
Keep these essential tips in mind, you won’t have to sweat potentially costly mistakes. If you are too busy to manage your payroll, labor and compliance issues, turn to a third-party firm for support. With penalties, lawsuits and employee loyalty on the line, there’s too much at stake to not do it right.