Save Money by Steering Clear of Common Payroll Pitfalls
By: Lisa Walker
If you’re the top dog in a small company, there’s a good chance you don’t always have time for smaller details that relate to staffing your venture. After all, you have a business to run and money to make. However, if you don’t dot your i’s and cross your t’s, it can cost you in the long run.
Certain payroll-related details can feel pretty convoluted, but that’s where Shikha Gupta, CPA, can help — starting with the following tips:
1099 vs. W2
When you first hire someone to work for you, you make the decision of asking that person to fill out either a 1099 or a W2. It’s important to know the difference between the two. In fact, as the U.S. Chamber of Commerce explains, making a mistake in this area can lead to severe penalties and even ruin your business.
In essence, anyone you hire on a temporary basis — freelancer, contract worker, electrician, etc. — should fill out a 1099. Those you hire permanently should complete a W2. There are pros and cons to both sides of the coin, as permanent staff typically receive benefits while temporary staff typically cost more per hour. A W2 will also mean paying your portion of payroll taxes.
While it can seem like a hassle to ask every temporary worker for a 1099, it’s a process made simple through online 1099 filing. If you like a temporary worker and later decide to hire them permanently, you can always switch them over at that time.
Exempt vs. Non-Exempt
Employee classifications don’t end after determining whether you need a 1099 or W2; you also need to decide if your permanent staff will be exempt or non-exempt. This boils down to whether your worker is eligible for overtime pay. Salaried workers are considered exempt while hourly employees are non-exempt.
Making a mistake here can cost you big time, as large corporations like GE and TGIFridays learned — to the tune of several millions of dollars apiece. It’s critical to verify that you classify workers correctly and pay your hourly employees for the time they actually work, including any overtime they are entitled to.
Keep Accurate Records
How much does it matter to you if your employee keeps good records? While it might seem the burden of accuracy falls to the employee, it actually falls to you as the employer, and as Foley and Lardner note, this is a critical point. Any failure on your part to maintain complete and accurate records leaves you open to penalties from the Department of Labor, as well as to lawsuits from your staff.
You’re allowed to use whatever means you see fit to achieve accuracy. This could be in the form of a physical time clock, electronic or paper spreadsheets, timekeeping software, and so forth. To avoid hefty fines and lawsuits, ensure your records are both complete and accurate in all regards, and that you pay your workers accordingly. Because of how critical this is, many employers opt for an electronic system through a trusted third party.
For all your workers who complete a W2, you will need to collect payroll taxes, and then you pay those funds to the IRS either every two weeks or once per month. How frequently you make those payments is dependent on how much tax liability you reported the following year (note this is the past 12 months, not the past calendar year).
Payments must be made through the government’s electronic payment system and can be completed by you or a trusted third party such as your bank or CPA. If you are late, you will be charged penalties, and those penalties will pile up the longer you wait to pay.
Payroll recordkeeping is not one of the most exciting aspects of running a business, but it’s definitely a critical one. Make sure you don’t fall victim to any of these common pitfalls. Connect with Shikha Gupta to learn more about how you can ensure your company is managing payroll properly.