10 Mistakes to Avoid When Processing Your Payroll
Many businesses are guilty of payroll mistakes at one time or another; it’s the natural fallout of a very complicated system that is not a direct part of the business’ “primary purpose”. Small businesses tend to try and skate along with “close enough”. Medium businesses get lost in the complexity of the systems and record keeping. Large businesses fall victim to the overwhelming task of trying to keep all the disparate records and activities straight as well as up to date. No matter where your company falls in the greater scheme of the marketplace, payroll is a minefield that every company with employees must navigate.
Since payroll is a complex system with lots of specious rules and labyrinthine twists in logic, there are some common areas where companies both big and small get caught in the gears of payroll liability.
Pay Your Payroll Taxes Consistently and On-Time! This may seem obvious but it can be a difficult hurdle for smaller businesses ventures that do not have dedicated staff to handle the job when it comes up every single period. Not to mention that penalties will be accrued regardless of “real life problems” that leave a part of the management team incapacitated (accident, illness, death, etc.) and penalties can range from single digit percentages up to 15% depending on tardiness. When placed in these terms, having a third party expert in charge becomes much easier to justify.
Do Not mix up Employee Categories. Knowing who is “Exempt Status” and who is “Non-Exempt Status” can be crucial once the IRS or the Dept. of Labor show up. Likewise, knowing when a resource qualifies as a contractor or an employee can be just as important. Many companies try to use these categories incorrectly to their advantage and it can cost them dearly down the line in fines, fees, penalties, and lawsuits; many of which will not be inconsequential and will grow with time. The average business person can have a hard time classifying that filing clerk that comes in once a week for an afternoon or the IT guy who comes in twice a month to do backups but the IRS, DoL, and the various other agencies involved do not, nor do they have much patience for shenanigans. If there is any doubt whatsoever, always contact a Human Resources professional.
An addendum to this is also to have the overtime rules for your state down pat. “Time and a half at 40 hours” is not actually a hard and fast rule even if it does apply in most cases. Employers need to be aware of the rules not only so they treat their employees accordingly but also so they don’t break the rules while actually trying to accommodate employees with the best intentions, including “comp time”. Don’t be the victim of poorly informed good intentions.
Keep Payroll Files Organized: Don’t let paperwork get skipped, lost, or disorganized. Another item that seems obvious but there are lots of hidden snakes that can strike here. Does your company get Form W-9 up front before paying new vendors the first time? Are all the Form W-2s and Form 1099MISC returned on time and correctly? Is the company ready for a “random” INS inspection with all Form I-9s not only complete and up to date but filed properly for quick access? Every business owner knows there’s a laundry list of forms that must be filled out, submitted, and/or retained but knowing exactly when, where, and who to direct them to is nearly a job in itself. As always, fines, penalties, and lawsuits hang over the heads of those who perform these duties. Having a qualified professional at least go over company procedures for all government paperwork and filing schedules is very much cheap insurance. Having a Human Resources professional manage the actual headaches is one of the best investments a company can make, regardless of whether they are an employee or an outsourced HR firm.
Don’t let the levies break: Getting Child Support, Levies, and Garnishments applied to employee wages in the proper order can be a challenge but it is critical that it is done correctly as mistakes turning up later can pile up to ridiculous proportions, both for the company and the employee. Even the most responsible employee can have things go wrong in their personal life, so having the details down (or a professional on speed dial) when the inevitable arrives is the best way to ensure that it is settled accurately with a minimum of fuss. This is good for everyone involved including the employer, the employee, and morale of the whole enterprise.
Avoid using Company Checks for Payroll: Regular draft checks can be used as a template for fraud and every check issued increases the opportunities for this to happen. Most vendors will be placing their checks directly into a bank account, so they are a very low risk for this type of malfeasance. Unfortunately, this is not the case with many employees as they will usually run the gamut from high income to low income with corresponding financial tools available to them at their respective income levels. While higher income employees will go to trustworthy banks, many entry or labor level employees may be forced to use less secure means including signing over to a third party, payday loan companies, and even the local liquor store. Add to this the fact that payroll checks are issued very regularly and it becomes obvious why having a third party issue more secure payroll checks is worth every penny spent on it when the company’s checking account balance may be at stake.
Watch Out for Creeping Compensation and Reimbursement Expenses: Income Tax applies to all forms of actual income but what is income? Where does the line fall between bonuses, gifts, and awards vs. reimbursement for expenses incurred while doing business? How deeply does the reimbursement blade dig? When does a covering an employee’s travel expenses for commuting to a different company location move from reimbursement to income? There are numerous and sundry ways for these details to slip from “small mistakes” into “giant fiascoes” that only a Human Resources professional will catch. Having a knowledgeable professional audit your payables can keep your company out of mountains of trouble, even if that trouble was the product of trying to take care of your employees properly.
Keep Records, Keep them Organized, and Keep Backups: Yes, we’ve already mentioned the importance of keeping your files organized, but how long does a company have to keep payroll records? 3 to 4 years for most cases but which case applies here? Are they organized? Is there a plan for disaster recovery of those records? What would happen if the person handling payroll and taxes took sick or was incapacitated in a bad accident? What happens if the computer where that person does all this work was stricken by a virus or ransomware? Having a third party handling these matters not only adds a level of redundancy to this scenario but also provides a level of protection and organization that can be difficult for a small company to match in the hustle and bustle of real life.
Confidentiality Matters: It may seem like a small thing but don’t leave payroll records of any kind lying around or sequestered in places where employees can easily peruse them. Not only can it lead to morale problems and foster dissatisfaction but it can have all kinds of messy comeuppance. Sarbanes-Oxley or HIPAA may not apply to your company but new rules crop up all the time and best practices are best started early; privacy laws are not likely to loosen in the foreseeable future.
Post the Posters: No matter how small your tiny startup is now and how pointless this may seem at the moment, the whole point of growth is to need those employees that require the posting of labor laws. The chances of remembering to put up posters during the whole chaotic process of bringing on a company’s first employee(s) are slim to none but the fines are definite and can be very large. When the penalties range from nothing to thousands of dollars in fines, a little wall space and a few dollars in sheets of plastic are cheap insurance. Do it as soon as the company has its first employee.
Company Size Does Not Matter! Do not give in to the temptation to short cut any of these guidelines based on the hope that the company is not big enough to gain the attention necessary or that the core group of loyal employees would never do anything that might lead to a compliance problem. The fines, penalties, and even jail time associated with these rules are not necessarily tied directly to the number of employees or the dollar amounts associated with noncompliance. Even a small company can get its owners in very large trouble.
This catalog of the pitfalls of payroll is far from comprehensive though it may be fairly lengthy. If your company is not large enough to have a payroll professional on staff, at the least an audit by a professional on a quarterly schedule should be considered. Considering the penalties involved, the cost of a quarterly consultation, or even having a professional handle the details on a regular basis, pales in comparison. Hiring a professional payroll provider will save your business money, improve the efficiency of your business and make sure you stay compliant with the hundreds of labor laws that impact your business. The alternative is audits, fines and interruptions to your business!
KEB is a preeminent provider of total human resources solutions for small and medium-sized businesses. We are committed to powering business with extraordinary HR, and improving humanity through growth and innovation. We embrace business productivity as a human resources partner, managing HR so clients can focus on growing their core business and achieving success. KEB offers HR Management along with cloud based payroll and employee training solutions.
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