Avoiding federal payroll compliance errors can save HR a lot of time and money. There are certain pitfalls as common as they are easy to avoid, while knowledge pertaining to these errors will help keep them out of your accounting.
Classify your co-workers correctly
Exempt or nonexempt? Employee or independent contractor? If you don’t know where employees fall in your company’s infrastructure, chances are you may not be submitting the right information to payroll, let alone the IRS. Failing to correctly report a worker’s status can result in a full overhaul of your accounting, an expensive and embarrassing process.
An exempt worker isn’t covered by the Fair Labor Standards Act (FLSA), so their hours aren’t paid individually. Rather, they get a set wage, regardless of how many hours they do or do not work. A nonexempt employee in the same circumstances would be entitled to an hourly rate plus time and a half for any hours worked past 40 in a single work week.
If you’re considering taking a shortcut on payroll software by classifying all workers as independent contractors, make sure they actually are first. An employer is only required to submit a 1099-MISC for all contract workers at the end of the year. Misclassifying any employee, though, can result in payroll compliance fines and possibly a lawsuit if he has been unjustly disallowed access to programs.
Take the right taxes
Once you know where each employee falls, make sure your payroll software is up to date and your HR professionals are trained on current practices as well. New legislation can change the amount of payroll withholding on everything from healthcare to Social Security, and programs within the company could change premiums or benefits at any time. If communication is a problem, this can result in internal dilemmas, but improperly calculating federal taxes can be a much bigger problem if the government catches it before internal accounting.
Mind the details
Retirement programs, life insurance and tax savings accounts all need to be calculated and reported correctly on W-2 and 1099-MISC forms where applicable. Incorrect information supplied to an employee and the IRS can lead to a spreadsheet nightmare of trying to track down the issue and sort out errors, creating a time-consuming and expensive problem that could easily have been avoided. Taking care in filling out forms may seem tedious, but it’s preferable to having to do everything over again and losing money for the business.
Need more information on government compliance? Visit our library of Human Resources Best Practices and Tools to download whitepapers like Avoiding Costly Fines: A 2012 Guide to Compliance Mandates or to view recorded webcasts like Wage and Hour—Staying on the Right Side of the DOL.