Running a business—whether large or small—comes with a lot of responsibilities. Not least among them is the duty to deal correctly with payroll taxes—from withholding federal and state income taxes when paying employees to contributing your share of FICA and ensuring unemployment taxes are paid. Unfortunately, it’s rather easy to make mistakes, and the penalties for missteps can be quite great. Here are a few of the most common payroll tax errors you should avoid.
Misclassification of Workers
Most businesses want to minimize their costs, and payroll taxes and employee benefits expenses can take a real bite out of the bottom line. This can make it tempting to classify some employees as independent contractors—even if they don’t actually meet the definition. If you have control over when, where or how they complete their work (requiring them to work out of your office or work set hours, for example), they are not independent contractors. You can learn more about worker classification on the IRS website.
Reimbursements Without an Accountable Plan
If you regularly reimburse employees for travel, tools or other costs related to your business and their work, an “accountable plan” is the only way to avoid wasting employment tax dollars. It allows you to deduct these expenses from your business taxes while avoiding paying payroll taxes on the reimbursements. Your employees won’t pay taxes on them either. You can learn more about the requirements of these formal reimbursement plans on the IRS website.
Incomplete Payroll Records
Every business with employees—or that uses independent contractors—must maintain payroll records. This usually includes time sheets and payroll tax documentation as well as copies of W-2s and I-9s. You must store these records for at least four years and be ready to present them for IRS inspection should the need arise. You can learn more about maintaining payroll records on the NOLO website.
Using Withholdings to Pay Other Bills
It doesn’t matter if your business is incorporated or is legally classified as a limited liability company; as the business owner, you are liable for the money withheld from your employees’ wages for the payment of their state, federal and FICA taxes. You should never use these funds to pay rent, utilities or any other business expenses—even if your company is in a dire financial situation. If you do so, you will incur the Trust Fund Recovery Penalty. Learn more about it on the IRS website.
Skimping on Payroll Company Oversight
Sure, hiring an outside payroll company to handle all the details of withholdings and payroll taxes can help you save time. However, should the company you enlist make an accidental or deliberate error, you’re still the liable party. For the best protection review your payroll account monthly and monitor tax payments to ensure the company has made them in a timely manner and for the correct amount.