Top 10 Payroll Mistakes

October 27, 2017 by Gordon Advisors

Payroll preparation can be tedious and complex thanks to our ever-changing tax rules and regulations, and even simple mistakes can cost your company. Here are a few common payroll pitfalls to be aware of and avoid.

1. Misclassifying workers who are employees as independent contractors.

Workers who are employees are covered by wage and overtime provisions of the Fair Labor Standards Act (FLSA). Misclassifying workers can deprive them of fair and legal compensation. Not sure if your workers are correctly classified? Read on!

2. No travel or commuting reimbursements reported as income.

Some reimbursements may be taxable. For example, travel to a permanent work site in a different location from the employee’s permanent residence or a short-term assignment that lasts longer than one year.

3. Not getting W-9s from vendors.

Failure to obtain W-9s for vendors receiving payments may subject the amounts to 28 percent backup withholding and failure-to-deposit penalties on amounts that should have been withheld.

4. Not including the fair market value of cash or cash equivalents in income.

Cash equivalents, such as a gift certificate for a Thanksgiving turkey or Christmas ham, are never de minimis. However, the gift of a turkey or ham is de minimis.

5. Not including taxable fringe benefits in income. 

Examples of taxable fringes include spousal travel, company-provided autos when not driven for business or when driven for business but not properly substantiated, and country club dues and housing that is not substantiated for business use. Check out this article from the Internal Revenue Service (IRS) about taxes on fringe benefits.

6. Not including unsubstantiated expense reimbursements in income.

Reimbursements are nontaxable only if they meet accountable plan requirements: substantiation of the amount (e.g., a receipt), date, business-related person or place, and date when the expense was incurred. However, no receipts are required if your company uses the per diem method for travel or cents-per-mile for driving.

7. Submitting W-2s with errors.

Every employee requires a W-2 so errors are common. Among the most frequent are social security numbers that do not match names, putting dollar signs in the boxes, omitting the decimal point and cents from entries, and using a font that is too light or too large (the IRS recommends black ink and 12-point Courier font). The IRS provides more information in its General Instructions for Forms W-2 and W-3.

8. Failure to make a timely deposit of withheld taxes.

Late deposits can incur a penalty of up to 15 percent plus interest. And don’t forget that all federal tax deposits must be made using the free Electronic Federal Tax Payment System®.

9. Failure to make a timely deposit of withheld taxes on exercised stock options and on vested restricted stock.

Deposit withheld employment taxes on exercised stock options within one day of the settlement date (which should be no more than three days after the exercise date). Generally, income on restricted stock is recognized upon vesting and subject to federal income tax withholding (FITW) and employment taxes on the difference between the shares’ fair market value and what the employee paid for them. Deposit the FITW and withheld taxes on the next business day.

10. No 1099s were filed when at least $600 was paid in the year to independent contractors and vendors.

Generally, the following conditions must be met to trigger the need for filing a Form 1099-MISC:

1. You made the payment to someone who is not your employee;
2. You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
3. You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
4. You made payments to the payee of at least $600 during the year.