The Most Common Payroll Mistakes Businesses Make
When your company is getting off the ground and starting to pick up speed, one of the main challenges is hiring employees. If you've been operating as a solo operation, the prospect of bringing someone else on board can be daunting.
• How do you pay them?
• How do I handle tax withholdings?
Adding a team member (or multiples) will increase the amount of behind the scenes work you'll have to do, but that's no reason to be intimidated. Once you get the basics down or outsourced to a professional (like us), the process will be seamless. To help you've compiled a list of common payroll mistakes we see with companies just starting.
Contractors or Employees: Understand the Difference
Small businesses that may need help around the office sometimes ease hiring by bringing in contractors to work specific projects. While they may come into the office now and again, it's essential to understand the differences between contractors and full-time employees.
The main difference between contractors and employees is for tax purposes. You are responsible for withholding taxes from employee paychecks and sending it to the government for social security and income tax. Come tax time; a W-2 form will outline how much you paid to the employee and what was withheld. Your employee will then use it to pay their taxes.
Contractors are responsible for paying their taxes on income they receive throughout the year. At the end of the year, you will send them a 1099 form that outlines how much you've paid them, which they can use on their business or personal returns. Unlike employees, you are not responsible for withholding taxes on what you pay contractors.
It’s important to remember each state has its own rules and regulations regarding tax guidelines for contractors and employees. For example, if you live in California or New Jersey, you might have heard of the ABC’s for determining who is considered a contractor over an employee. These strict guidelines determine whether or not a person can be considered an employee or a contractor, and as the gig economy continues to grow, you can expect other states to follow.
Pay Attention to Payroll Taxes
When it comes to paying taxes, what you pay, and whom you pay depends on your location. There may be federal, state, and local requirements that your company will need to abide by.
Potential Tax Categories:
Medicare tax
Social Security tax
State unemployment insurance tax
Federal income tax
Federal unemployment tax
State income tax
Local income tax
If you miss a payment, it could cost you. So spend some time getting to know your specific tax requirements. Referencing the IRS website is always a great place to start.
Develop a Payroll Schedule
For most companies, payroll is the most significant expense they face each month. Determining when to pay employees can have a substantial impact on your cash flow.
Look at your outstanding accounts receivable and review when they are due. If they are all due at the end of the month, paying employees once a month may be the way to go. However, there are employee expectations to consider, and some employees may not be able to wait until the end of the month to get paid, so analyze your cash flow and get to know your team's needs before making a decision.
Understand Overtime Rules
If you've ever worked over a holiday, you understand the enjoyment of opening your check and seeing time-and-a-half payments. However, as the employer, you need to know the overtime pay rules and make sure you follow them down to the letter. If you don't pay the correct rate, you may end up owing penalties, back pay, or interest.
According to the IRS, after 40 hours, your employees are entitled to get 1.5 times their regular pay for every hour worked. However, this doesn't apply to full-time salaried employees.
Larger companies tend to rely on enterprise solutions, accompanied by a payroll staff, to administer payment to employees and oversee the tax obligations. If you've surpassed the 1-5 employee mark and you are uncomfortable with this process, contact us to discuss adding payroll services to your current Basis 365 services. Outsourcing your payroll can keep small mistakes from becoming more extensive than they should.
