Payroll mistakes are defined as payroll errors by businesses to the IRS. While the IRS outlines what payments are necessary and their deadline, every employer has the responsibility to complete payroll correctly; otherwise, there are penalties. A seemingly small payroll error could mean a hefty fine from the IRS, so for your business’s sake, you’ll want to do your best to avoid these mistakes.
Learn more about 8 common payroll mistakes:
1. Paying late
Perhaps the most common payroll mistake is simply having your company missing the pay period. The government adds an interest rate on any filing and payment that is late.
- 1-5 days late: 2% interest
- 6-15 days late: 10% interest
- Past 16 days (but within 10 days of notice): 10%
- Past 10 days of notice: 15%
In addition to depositing late, any deposit that is made by an unauthorized financial institution, or deposited incorrectly (not using EFTPS) is subject to a 10% interest rate.
Avoid late penalties
To avoid paying late penalties and interest, mark your calendar for all federal and state due dates. Be mindful that some due dates are on a bank holiday, so you’ll want a couple of buffer days for processing. If your business missed the deadline for what you consider the reasonable cause, you could submit a letter to the IRS to remove the penalty.
2. Not paying the correct tax amount
Calculating the correct tax rate for your business is crucial to avoid payroll errors and penalties for over or underpayment. Both underpayment and overpayment by businesses add the same amount of interest to your taxes. The interest is adjusted quarterly based on the federal rate and adding .5%. Currently, in 2021, the interest rate is 3%. fed rate +.5%. For 2021 an added interest rate of 3% is added for any incorrect tax payment. If you need to correct an underpayment or overpayment on payroll taxes, you can use specific forms to make adjustments.
Avoid paying the wrong amount
Paying the wrong amount of taxes often means somewhere in your calculations or reporting, something went amiss, causing a payroll error — whether that is calculating employees' wages or gross pay or calculating the wrong tax rate for your business. Payroll support can do the calculating and forms for you, making sure your company never miscalculates wages, pays the wrong amount, or gets extra interest on your taxes.
3. Not paying at all
Not paying any taxes may seem like an obvious payroll error, but it is still a common mistake people make and one of the most costly errors. By not filing, not paying payroll taxes, or not filing correctly, you are looking at penalties for all the above.
Avoid large penalties for not paying
This one is pretty simple — just pay your taxes! Avoiding paying taxes will ultimately cost you more money with the penalty fees associated, and perhaps even criminal penalty, than just paying your taxes.
4. Not paying the correct overtime pay
For most hourly employees, any hours worked over 40 hours a week is paid at time and a half (1.5) Miscalculating overtime often happens when employers make errors and exclude bonuses, incentive pay, cash benefits, shift differentials, or longevity pay to calculate the regular rate. It’s a requirement that all these factors are included in the regular rate, which helps determine the overtime rate. Not paying the correct overtime means employees may sue and could mean your company is liable or fined by the federal and state government.
Avoid miscalculating employees overtime pay
To avoid miscalculating employee hours and their overtime (and penalties or litigation), look up what your state laws are on overtime through the state’s labor department, as well as federal. In addition to that, be sure to add all factors needed in calculating the regular rate. General record keeping and timesheets or payroll software can help avoid this as well.
5. Misclassifying employees as independent contractors
Misclassifying and miscalculating many times go hand in hand. For example, if you misclassify an employee, you will miscalculate that employee’s tax withholdings and create more mistakes. Thus, classifying employees is an important step for calculating correctly. Misclassification is identifying employees as independent contractors through 1099 instead of a w 2. Often this is done to avoid paying taxes, paying compensation, and unemployment benefits. The IRS fines $50 plus 1.5% of wages and 40% of FICA taxes the employer should have withheld, and 100% of what the employer should have matched. These fines add up quickly and can be devastating for employers and leave employees with little support.
Avoid Misclassifying employees
Use the correct forms (w-2 or w-3) to classify employees vs. independent contractors. For the most part, every new employee will use form W-2, and every independent contractor will use form 1099. If you are confused on what qualifies employees vs. contractors, look to the IRS guidelines and labor of bureau to help define if workers are employees or independent contractors.
6. Miscalculating pay
Employers miscalculate pay or gross wages when they don’t count other fringe benefits as a part of full-time employees’ total gross pay. For example, stock options, achievement travel, employee discounts, etc., are all subject to federal income tax and your employment tax withholding. You must report all these types of payments as a part of the total pay calculation for employees. Excluding these benefits or miscalculating pay results in significant financial penalties.
To calculate pay correctly and avoid errors, be sure to include all fringe benefits. Or you may want to talk with a payroll expert about doing calculations for you.
7. Misclassifying exempt employees
Another common misclassification is not classifying exempt employees correctly. According to the department of labor, certain employees are exempt from minimum wage and OT for over 40 hours worked in a workweek. Find the full list and terms for exemption here. Misclassification of employees as exempt (when they are actually non-exempt) from overtime is one of the most common Fair Labor Standards Act (FLSA) violations and a focal point for government enforcement.
Avoid Misclassifying exempt
If you think you have exempt employees, be sure to use the US department of labor’s classification guides to be sure they are not non-exempt to avoid payroll errors.
8. Keeping incomplete records
Many record-keeping mistakes and errors are due to manual payroll, data entry mistakes, or just incomplete payroll records. Many of these mistakes are avoidable with proper payroll records. Having a system in place, or moving manual payroll online can save you lots of time and money.
Avoid payroll errors in record keeping
Getting help with your payroll records and taxes can be hugely beneficial to any team and help you avoid payroll errors. We know payroll is an extra and often consuming task for businesses, so we have experts on our team to help, and software to make the organization simple. We help you avoid those common mistakes and create a payroll system that works for you.
Frequently asked questions
What are payroll mistakes?
Payroll mistakes are instances when an employer doesn’t file, pay correctly, or makes another payroll error when paying the IRS. Each payroll mistake often comes with a penalty or a fine costing companies money. Common errors can impact businesses' ability to be successful and retain employees.
How can I avoid payroll fines?
There are four instances when your business can get penalized by the IRS for not paying payroll and income taxes. Failure to file, meaning employers don’t file by the due date. Failure to pay, meaning when employers haven't paid the taxes reported on your return by the due date. Failure to pay properly estimated tax, meaning when employers don’t calculate the accurate amount of taxes in a year or pay for the tax rate. And lastly, dishonored check, meaning a check bounced. See specific penalties for these payroll errors here.