Payroll Compliance is a challenge that many small businesses struggle with. Payroll done by business owners themselves mean that they need to have the know-how to comply with the Internal Revenue Service’s strict rules regarding accurate reporting & deposits. Moreover, federal, state & local tax regulations change & many times without notice. Small business owners need to follow such changes keenly as well.
Having a professional as a trusted guide & advisor helps small business owners (SBO) navigate these dangerous waters. It also saves them time and costly errors. Errors which are due to late filing or deposit of taxes increase the risk of steep penalties & scrutiny from the Internal Revenue Service.
Mistakes & How to Avoid Them:
Misclassifying Employees: It is very important to correctly classify a worker-either as an independent contractor or as an employee. More on how that determination is made, is on my post here. This is a rampant problem and therefore the Government has enacted an Employee Misclassification Initiative. Misclassified employees are often denied access to critical benefits and protections and it also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers compensation funds.
To Avoid: The SBO should learn the government definitions & the rules & regulations regarding worker classification.
Late Deposit of Taxes & Forms: There are due dates stipulated for depositing taxes & for filing the required forms by the IRS. Failure to meet these due dates may result in failure-to-deposit penalties upto 10% based on the total payroll amount & a 5% failure-to-file penalty.
To Avoid: The SBO should start preparing for payroll taxes early and keep a watchful eye on the timeline.
Incorrect Forms Filed: Correct forms are necessary so that over or underpayment of taxes can be avoided. Correct forms also help with year-end reconciliation so the employees get correct W-2s. The business owners should also that the forms are signed before submission.
To Avoid: The SBO should first verify the version of the forms being filed & make sure they are the most recent. They should double-check their figures.
Submitting Incorrect Amounts: The business owner will incur a penalty from 2 up to 10 percent if the wrong payroll amount is deposited. The penalties start accruing from the due date of the taxes. They can only be avoided if the failure is due to a reasonable cause and not willful neglect. There can be a one-time abatement sought.
To Avoid: The SBO should make sure the math on the form is right if being done by hand. The numbers should be placed on the correct line numbers. Everything should be double-checked.
Personally I urge all small business owners to hire a professional to do this job. Having a copy of the Publication 15 (Circular E) is a must.