Help Junior-Level Employees on Your Teams with these Common Payroll Mistakes

What are your top payroll lessons learned? We compiled a list of top mistakes, but we would also love to add your personal experiences to this list!

Incorrectly Classifying Workers
One of the most common errors in payroll is misclassifying employees as independent contractors. In fact, it is estimated that 3.4 million employees are classified incorrectly. This is a particularly  big problem in the U.S.

The IRS uses the following test to determine whether someone is an employee or a contractor.

  • Behavioral: Does the employer have the right to control how the above workers do the work for which they were hired?
  • Financial Control: If the worker has unreimbursed business expenses and invests in their own tools, they are likely an independent contractor.
  • Relationship Type: Workers who have a written contract and don’t have vacation benefits or health insurance coverage, are typically employees.

You’d think it would be easy to classify employees correctly, but errors commonly happen regarding 1) an employer’s share of social security and Medicare taxes 2) overtime pay 3) employee benefits, including vacation, holiday, and sick pay 4) unemployment tax and 5) workers’ compensation insurance.

As we mentioned in a previous post, the UK recently revamped its rules for IR35 forms which affects contractor classification. Beginning April 2021, private sector employers in the UK became responsible for determining whether IR35 applies to any contractor they hire. Basically, the new rules require them to treat any contractor they hire as an employee for tax purposes.

For a complete look at how to avoid wrongly classifying workers, see Papaya Global’s guide on How to Avoid Misclassifying Contract Workers.

Catching Errors
If a payroll department does not catch the errors,  often the errors will be caught if a worker believes he or she has been misclassified and files a complaint with a state or federal entity. Other times the errors are caught via regular government audits.

Cost of Mistakes
These errors can impact the company’s bottom line. The penalties vary, based on whether the mistake appears intentional or fraudulent.

Unintentional Errors
– $50 for each missing W-2 form when a worker is misclassified as an independent contractor
– 1.5% of wages, plus 40% of FICA taxes (Social Security and Medicare) that were not withheld previously, along with 100% of the matching FICA taxes
– Another penalty of 0.5% of unpaid tax liability for each month up to 25% of the total tax liability.

Intentional Errors
If fraudulent activity is suspected, the IRS may impose an additional 20% fine on all wages paid, plus 100% of the FICA taxes, for both the employee’s share and the employer’s share.

Payment Miscalculations
Poor timecard capabilities can often lead to miscalculated pay. This can also happen if overtime is calculated every two weeks instead of every week or if someone decides to estimate the last couple of days of an employees’ work week, rather than waiting for a completed timecard. Another issue to consider? Not paying non-exempt employees for all time worked. For example, if an employee is hourly, you must remember to have them clock their travel time and waiting time.

Failure to Issue 1099’s for Contract Workers
In the U.S., if a contract worker exceeds $600 in payment for a single tax year, they must receive a 1099—MISC by Jan. 31. To make sure you have information ready, be sure to collect W-9 information from any independent contractor as soon as you begin working together.

Wrong Employee Details
Other common errors include misspelling an employee’s name, adding the wrong address, mis-typing  social security numbers, dates of birth, or employee start dates.

Withholding Errors
Common errors include failure to withhold state or federal taxes, inaccurate calculation of pre-tax and post-tax deductions, failure to include taxable fringe benefits like bonuses, excluding reimbursable amounts for travel and other eligible expenses.

Misprocessing Garnishments
Payroll professionals must be familiar with different rules for garnishments, including fines, taxes, child support, and more.

Not Depositing Taxes in a Timely Manner
Failing to make a timely deposit results in a fee up to 15%. Before the beginning of each calendar year, any U.S. organization must decide between two IRS schedules for the year: monthly or semi-weekly. Additionally, deposits for FUTA tax or Form 940 dictate quarterly deposits when tax exceeds $500. As a result, those taxes must be deposited by the end of each month that follows the end of a quarter.

Failing to Send Out Tax Forms
Typically, within the U.S., employers have until Jan. 31 to send out all necessary tax forms to employees, including W-2 forms and 1099s for independent contractors who earned more than $600.

This is also a great time to ensure you are paying the right tax rate. Tax rates change often and need to be audited and updated. Make sure to have the correct tax rates so your company will avoid owing taxes or have to make a payroll correction.

Payroll processes are constantly evolving with new rules, regulations, and tax rates. Keeping your team aware of common errors and staying on top of changes to regulations will help your company stay ahead of the game in preventing costly mistakes, while also protecting the accuracy of employees’ paychecks.

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