Employer Insights

4 Payroll Compliance Mistakes Employers Make

by Employer Pass, on Mar 4, 2021 2:52:08 PM

No matter what size your business is, making sure that your payroll software and processes comply with every applicable payroll and labor law can be challenging. Payroll compliance errors and mistakes can attract costly penalties from organizations like the Department of Labor (DOL). 

Wage and payroll issues tend to be one of the most common areas of legal claims made against employers. In fact, the Wage and Hour Division (WHD) of the U.S. Department of Labor received about 9,000 calls per day in 2020. Among other reporting methods employees use, this equated to more than 16,000 cases for minimum wage and overtime overtime violations in 2020, which is actually down about 4,000 cases from the yearly average (presumably as a result of the pandemic / COVID-19). 

In California alone, the California Labor Commissioner's Office noted that the Department of Labor reported minimum wage laws were violated in the state 372,000 each week

Should the labor commissioner for your state conduct an audit and find payroll inconsistencies that violate minimum wage, or any Fair Labor Standards Act (FLSA) or wage regulations, the potential penalties could run into the hundreds of thousands. In addition, correcting these issues or mistakes in the form of paying back wages could add to those costs.

Outsourcing payroll to a professional payroll services company is one good solution to the problem of payroll compliance mistakes, but what kinds of payroll errors would outsourcing help you avoid?

Here are some examples of payroll compliance issues to look out for: 

Classifying Employees Incorrectly

Employers need to assign the right kinds of classifications the people that work for them - as employees or contingent workers. Each one of the classifications tends to be defined in somewhat ambiguous ways that make misclassifications common. 

For employee types, there are full-time, part-time, temporary, and seasonal employees. While contingent worker types can include freelancers or consultants.  

Employers, however, are able to use Form SS-8 to ask the IRS about clarifications with employee classification. Labor-intensive as it can be, seeking clarifications for each employee is a foolproof way to be on the right side of the law. Many employers, however, tend to take shortcuts, and end up misclassifying their workers, and paying penalties as a result.

Making mistakes maintaining employee records

New call-to-actionUnintentional non-compliance is common in payroll operations as a result of the large number of records and rules that payroll departments need to deal with. In addition, records need to be archived for years -- usually between three and seven. These requirements can lead to unwieldy filing and compliance burdens on payroll departments. Missing records are common, and lead to penalties.

Payroll processing and compliance is labor-intensive work for any employer, especially considering the fact that rules and specifics tend to change on a regular basis. Pressing more employees into service to help keep every record straight is one way to ensure that mistakes are avoided. 

Making Direct Payments to Employees Outside of Payroll

Payments businesses make to their employees, no matter what form they may take, are typically taxable. The Internal Revenue Service (IRS) makes it mandatory for employers to withhold payroll taxes from payments made to employees. 

Making direct payments to employees, however, tends to be a common payroll mistake that companies make and can prove costly to fix if discovered. A few examples of direct payments that companies mistakenly make include things like bonuses, commissions, gift cards, physical gifts for employees, but these are all taxable and subject to payroll tax. 

A general process to avoid this is ensuring any payments to employees are made through your payroll software, payroll department, or payroll company. They will help identify any exceptions to the IRS rule as they come up, such as employee expense reimbursements if managed through an accountable plan. 

Missing Reporting Deadlines and Filing Late Payroll Taxes 

Missing these reporting deadlines or the late filings for the following can be a common occurrence and will result in fees and penalties.

New Hire Reporting

The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 made it mandatory for employers to inform the appropriate state agency of all new hires that have been made within 20 business days of the date of hire. State agencies report new hire information to the National Directory of New Hires.

Quarterly Payroll Tax Filing 

Form 941 - each quarter, an employer must file Form 941 with the IRS to report withholdings from employees paychecks for income taxes, Social Security tax, and Medicare tax. Form 941 instructions can be found here.  

W-2 - at the close of each tax year, typically no later than January 31st, the IRS requires employers to send employees a W-2. Employees then use any W-2s they receive to file their federal and state taxes.

1099 - for contractors, also at the close of each tax year, typically no later than January 31st, the IRS requires employers to send 1099-MISC forms. This is only required for contractors paid $600 or more during the year.  

1096 - if an employer files 1099 forms, to do their taxes, they must also use a 1096 form when filing traditional paper taxes, which acts as a cover sheet or summary for the IRS regarding the 1099 forms that follow.  

Form 941 and any W-2s should both typically be handled by your payroll software or payroll company. While the forms 1099 and 1096 are typically done by an accountant or accounting firm.  

To avoid risk of non-compliance and to ensure you're not making these payroll mistakes, outsourcing payroll processes to an third-party payroll provider can be a great option. These payroll processing firms dedicate themselves to keeping up with changing legislation and ensuring compliance in every way required for their clients. Passing payroll responsibilities to a payroll company can be the most efficient and cost-effective way for employers to simplify payroll and ensure accuracy.

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