Avoid these 10 costly payroll mistakes
Navigating payroll intricacies is vital for organizations in Sioux Falls as they manage accounting and reporting, especially during year-end. Accurate documentation and precise withholding practices are key components for sustaining financial well-being in the community.
While ensuring employees are paid accurately might seem straightforward, payroll involves numerous complexities, and overlooking certain aspects can lead to significant problems. Eide Bailly compiled a list of the most common payroll mistakes we see organizations make and the potential costs associated with each.
1. Errors in employee information
Using an employee’s full legal name for reporting purposes is crucial. Mismatches between names on W-2s and Social Security cards can trigger no-match letters from the Social Security Administration. Incorrect Social Security numbers or addresses can lead to misapplication of funds, resulting in changes to W-2s and state unemployment returns. Failure to correct these errors promptly can result in a $50 penalty for each occurrence.
2. Incomplete new hire paperwork
When onboarding new hires, completing specific forms like W-4 and I-9 is essential for accurate payment and reporting to federal and state agencies. Failure to have copies of these forms can result in a $50 penalty for every incorrect W-2 form, along with valuable time spent correcting information through the SSA online portal.
3. Misclassification of employees
Differentiating between W-2 employees and 1099 contractors is critical. Misclassifying employees can lead to lost benefits, higher self-employment taxes for individuals, and financial repercussions for the organization, including back taxes, unemployment taxes, and penalties for misclassification at state and federal levels.
4. Lack of a documented plan for pre-tax deductions
Offering pre-tax deductions, such as health insurance or health savings accounts, without a documented plan in place can lead to significant penalties. If you’re a 2% or greater shareholder of an S Corporation, participating in a pre-tax plan is not allowed. Failing to maintain compliance may result in the loss of savings for both participants and employers.
5. Incomplete reporting of taxable wages
An annual check of accounts payable can uncover checks written to employees outside of payroll, including cash bonuses or non-business-related expenses. Failure to report all taxable wages can result in audits by federal or state agencies, requiring amendments to past returns and potentially costly penalties for both employer and employee.
6. Neglecting payroll software updates
Closely monitoring updates for accounting or payroll software is essential. Overlooking updates may lead to over/under-withholding issues, requiring time-consuming amendments to payroll returns and W-2 forms. Additionally, organizations may face explanations to employees and potential penalties for software-related errors.
7. Incorrect reporting of employee state
Understanding state requirements for employees who move or work in multiple states is crucial. Incorrect information on W-2s can upset employees during tax return filings, necessitating amendments to W-2 forms and affected state returns.
8. Misapplying tax payments to the wrong quarter
The timing of tax payments is important, as misapplying payments can result in over/underpayments and letters from the IRS. Correcting this error requires significant paperwork and time.
9. Incorrect time reporting
Maintaining a time and attendance system is vital for accurately documenting employee hours. Incorrect time reporting can lead to public scrutiny, loss of employee trust, and potential legal issues, particularly if overtime is not reported correctly.
10. Failure to reconcile payroll returns to the W-3
Ensuring federal and state forms align with W-3 taxable wages and tax withholdings is crucial. Discrepancies can result in notices to fix returns or W-2s, requiring time-consuming paperwork for both federal and state agencies.
Effective payroll management is essential for your organization’s financial well-being. By avoiding these common payroll mistakes and staying informed about ever-changing regulations, you can ensure accurate and timely payroll processes. Whether handling payroll in-house or outsourcing, prioritizing compliance and accuracy is key to success.
If you need support, the experienced professionals at Eide Bailly possess extensive expertise in accounting and payroll, ensuring accurate documentation and reporting of payroll taxes.
A version of this article originally appeared on EideBailly.com.
Kristina Meulebroeck
Kristina Meulebroeck is the Outsourced Payroll Senior Manager for Eide Bailly LLP. As a seasoned financial, payroll and human resource leader, Meulebroeck provides key insight and advising to business clients, helping them to streamline processes, develop policies, and work within regulations.
