With tax season just around the corner, businesses everywhere will be checking to make sure they have reported records accurately for the past business year. Many HR departments and small business owners have struggled with processing payroll. The task can be overwhelming at times, which may result in pay mistakes. In order to avoid errors, which can cause substantial penalties and fines, the following points represent essential information that every employer should be aware of regarding compliance during payroll processing.
5 Mistakes Employers Make Concerning Payroll
1. File forms on time – In October of 1996, the federal government passed a law that requires all employers to report new hires to their individual states. From there, the states then report the starting employee to the National Directory of New Hires. Most employees are expected to be reported within 10 to 20 business days. Employers should always keep a copy of W-4 and I-9 forms on file documenting every employee. Withholding this information could lead to an audit by the IRS if a report is made.
It’s also important to send the correct forms when filing for taxes. If you are unsure whether a document is required, it’s better to send it in than be sorry that you didn’t later on. Employers who fail to send all qualified forms could be subject to penalties.
2. Not reporting a worker as an employee – Many businesses, big and small, have different relationships with their workers. Workers can be classified as an employee, an independent contractor, a statutory employee or a statutory non-employee, meaning not all workers are continuously employed with a business. If you aren’t sure how to classify a worker, there are several things you should do before hiring and independent contractor. Firstly, make sure to use the IRS Form SS-8 to determine worker status for tax purposes. This form should be submitted to the Internal Revenue Service (IRS) which will notify the employer as to what category the worker should be classified under. It’s important to withhold taxes and report wage and tax information during payroll periods until the IRS has contacted the business with their classification decision. Not withholding taxes or reporting wages could result in a company paying more to the government after filing taxes.
3. Tax regulation for families – Children under the age of 18 employed by a parent, whether they are the sole proprietor or a member of a 50/50 spousal partnership, do not have to file for Social Security, federal unemployment or Medicare taxes. If the child is still employed after he or she turns 18, the child must have Social Security and Medicare taxes withheld from their paychecks. They may, however, continue to be exempt from federal unemployment tax until they turn 21. It’s important to remember the U.S. and state departments of labor monitor classification of workers closely, which is why employers need to identify the family relationship with an employee. Spouses who are employed under one another through a sole proprietorship need to have Medicare and Social Security taxes withheld, but may be exempt from federal unemployment taxes.
4. Fair Labor Standards Act (FLSA) – Minimum wage, overtime, child labor, recordkeeping and equal pay are governed by federal law and they are often some of the most common mistakes regarding FLSA compliance issues. However, business owners must also comply with state regulations regarding specific standards in the workplace if they benefit the employee. Federal law sets the standards for the workplace, such as minimum wage, which is listed as $7.25 per hour and $2.13 per hour for tipped employees. When conducting payroll, it is imperative that HR managers and business owners check their state laws to ensure that they are in compliance.
5. Keep records organized – Any and every document regarding an employee should be kept on file. Paper documents, especially new hire documents, reviews, disciplinary action, and termination paperwork should be stored in a safe place, even after the employee leaves the company. The following is a list of time regulations for employee documentation from the FLSA:
• Employee payroll records need to be stored for three years after the last entry date.
• The IRS requires employee records be held on file for four years after they leave the workplace. Businesses risk fines if they fail to do so.
• Any workplace that employs 50 or more workers must keep records regarding any employee leave in compliance with the FMLA.
• Every state adheres to individual laws governed by unemployment agencies that require businesses to retain employment records. The time frame to hold onto these records can last between four to seven years.
Neglecting to maintain proper payroll paperwork for the above could lead to trouble with state and federal governments. These tips can help HR and business owners better manage employee records and payroll receipts to make sure their company is in compliance with payroll policy. For further information about payroll policy, we recommend looking at the U.S Department of Labor website.
For a more detailed overview of critical compliance issues for 2013 and beyond, as well as summary of options that will help ensure your business can meet regulatory demands register now for the live webcast Compliance in 2013: Are You Prepared? on January 29, 2013 from 1:00 p.m. to 2:00 p.m.