When starting a new business, looking for investors, bringing startups to life, or implementing your mobile business ideas, you don’t think about the problems you may encounter in setting up your business.
If you think it is enough to choose the legal form and types of economic activities for a successful business, you are deeply mistaken.
Most often, the new owners of the companies have questions about the taxation, the order of accounting, and legal issues regarding the conduct of contractual and judicial work.
But beyond that, some of the most common mistakes new and inexperienced business owners make are pay stubs. Even minor errors in paystubs can cause significant losses for your company.
Payroll errors may result in severe financial penalties, lawsuits, and audits, among other things. State and local governments, the IRS, and the U.S. Department of Labor may look into you. Additionally, if your errors result in inaccurate wage calculations or otherwise negatively affect workers, they may diminish staff morale, which can cause other issues like decreased productivity.
We suggest you consider some of the possible problems so that you can be prepared and able to deal with them.
Mistakes in Employee Information
Usually, these mistakes are made by business owners when first hiring an employee. Misspelled first and last names and different or erroneous numerals in Social Security numbers can lead to penalties from the IRS for not accruing or improperly assessing taxes. Therefore, you should check the payroll documents you make several times.
Employee vs. Independent Contractor
There are two basic types of workers that you must distinguish when hiring and paying wages: employee and independent contractor. Depending on the staff’s category, the tax and reporting procedures differ.
However, the issue of determining the type of worker is complicated enough that it has even been the subject of judicial review.
The Supreme Court found in a recent decision that no definition can solve all the problems in an employer-employee relationship. The court also stated that the description of the type of relationship could not be based on specific and isolated factors but rather depends on the circumstances inherent in the entire activity. However, the essential criterion is whether or not an individual is economically dependent on a putative employer. The employee is dependent upon the business of his employer. The Supreme Court has identified the following factors as essential in determining the type of relationship:
- whether and to what level the employee is an integral part of the employer’s business (e.g., whether the employee performs the principal type of work the employer offers customers or whether the employee performs only a separate part of the overall production process, whether such employee has subordinates);
- the length of time the relationship has existed (how long the person has been with the company);
- the portion of the worker’s investment in the employer’s business (whether the employee is reimbursed for consumables or uses their tools and equipment)
- the level of control from the business owner (who sets the amount of working time, who controls the quality of the work done, whether the person has a position in another company)
- whether the employee is entitled to a share of the profits if they work more efficiently;
- the employee’s skill level required to do the job.
Why does it matter? An employee has more rights and protections than an independent contractor. The former, for example, must be paid at least the minimum wage, while the latter has no such guarantees.
That’s why a Global PEO is helpful for companies in order to avoid penalties, being compliant with the law wherever they want to make business.
Delinquency in payments
A business owner must fulfill their obligations on time. Complying with deadlines in paying wages, taxes, and tax returns are essential. If fees are not made on time, the IRS has the right to fine you. So try not to get bogged down in the day-to-day routine, but meet your bi-weekly or monthly payroll and tax obligations as prescribed.
Follow federal and state rules when it comes to maintaining payroll records. You must keep payroll records for at least three years, and some states extend this period to six years.
Employers must keep records of employees who fall under the Fair Labor Standards Act. There is no mandatory form of record-keeping, but you must keep a description of the employee’s information, the amount of time worked, and the wages you have been paid. You must record and maintain information about:
- The employee’s name and Social Security number;
- The employee’s address;
- Date of birth;
- Gender and occupation;
- The start time and day of the work week for each employee. The number of hours worked per day and total for the work week.
- Amount of hourly pay;
- Total without interruption for the day or week, for overtime, all premiums, and deductions from wages in paystubs;
- Total wages for the pay period;
- Date of payment.
Fees and child support
You’d be surprised, but employers can be held liable for not withholding wages for child support or other mandatory fees (payments).
Suppose alimony, fines, taxes, or other payments have been awarded from your employee’s wages. In that case, you are responsible for making such withholdings on time and at the proper amount and remitting them to court-ordered needs. You must send this money to the payee that the court has identified.
Depending on the state and type of debt, different regulations may apply to the frequency and proportion of withholding. If an employee is given orders for several levies, the fees become considerably more complicated. Consult your tax advisor if you receive notice of a court-ordered salary garnishment or child support obligation.
Your biggest payroll mistake is not knowing the regulations. The biggest payroll blunders made by employers all appear to stem from a failure to comprehend the rules, even though the subtleties and complexity of each law seem never to stop. Unfortunately, ignorance is not an acceptable defense in the eyes of the authorities.