3 Payroll Mistakes that Can Cost You

There are still a fair number of small businesses in the U.S. that continue handling their payroll functions in-house. That’s fine. But unless the small business employs a key number of experts who know tax laws inside and out, handling payroll in-house is an open invitation to mistakes that can result in costly penalties. Furthermore, the U.S. tax code seems to grow more complicated every year. Small businesses are flocking to online payroll services because they are finding it difficult to keep up on their own.

Below are three payroll mistakes that can cost you a lot if you are still handling payroll in-house. As you read them, bear in mind that the IRS assessed more than 6 million penalties totaling some $4 billion for the 2015 tax year, against companies who incorrectly reported and/or paid employment taxes.

GP - 3 Payroll Mistakes that Can Cost You

Mistake #1: Calculating Taxes Incorrectly

Properly processing payroll begins with the calculation of three taxes that must be paid on every qualifying employee: Federal income tax, social security tax, and Medicare tax. Employers also have to pay FUTA, but that’s a separate tax that does not affect employees. Of course, there are also state income taxes to consider too.

Small businesses that handle payroll in-house also tend to use manual calculation methods. In other words, they use a pen and a calculator to figure it all out. This is where a majority of incorrect calculations come from. Something is multiplied wrong, information is transferred from one sheet to the next incorrectly, or taxes might be calculated improperly because an employee was not paid the right amount. There is a tremendous amount of information to keep track of, information that is easy to find yourself lost in.

Mistake #2: Using the Wrong Tax Rates

The federal government issues tax rate tables at the start of every fiscal year. These tables are what employers use to figure out how much to withhold and pay. Online payroll services use the same tables. However, mistakenly using last year’s tables could end up in a miscalculation that could cost your company big time.

As an example, consider the wage base for social security taxes. It tends to go up every year. This wage base tells you how much of an employee’s gross earnings is subject to tax and at what rate to apply the tax. It is going up in 2017. If you don’t have the correct tax table at the start of next year, how will you know how much to withhold and pay?

Mistake #3: Not Making Payments on Time

Tax withholding, reporting, and paying can be an overwhelming experience for small business owners. One of the biggest and most costly mistakes business owners make is not setting enough money aside to pay taxes when they are due. This almost always relates to FICA.

FICA is a combination of Social Security and Medicare taxes. Not only do employers withhold a certain amount from paychecks to cover employee taxes, but they also have to pay an equal portion themselves. This is where the problem comes in. Business owners can get so busy taking care of their customers that they simply forget to set their portion of the taxes aside. When it comes time to make those payments, the money is just not there.

Contracting with an online payroll services company addresses all three of these mistakes by handling most of the work for you. Service providers keep track of all of the information, do all the calculations, handle reporting, and make sure payments are made on time. Why would you not use a payroll service?