BY REAGAN DAILEY, Major Accounts Vice President of Sales, ADP Inc. in Houston
As business owners start planning for the New Year, they may want to take special care before closing the books on 2011.
With more than 27,000 recent changes to business tax laws, companies will likely find that completing even the most basic of administrative functions – employee payrolls – is fraught with risk. And errors can be costly.
Automatic Data Processing, Inc. (ADP) is in a position to know. As one of the world’s largest providers of human resources outsourcing solutions, we issue paychecks to 1-in-6 U.S. employees. In Texas alone, we handled more than 47,000 business tax returns last year.
This experience puts us in a unique position to observe the most common ways companies can trip up at payroll time. The list below, prepared in conjunction with the nation’s leader in payroll education—the American Payroll Association—identifies the Top 10 Preventable Mistakes Payroll Managers Often Make. It gives a taste of what we’ve seen during our more than 50 years in business.
This should be useful for your company, whether it handles payroll in-house or trusts it to an outside provider.
1) Misclassifying nonexempt employees – Employees classified as nonexempt must be paid the minimum wage and overtime when working more than 40 hours in a week. When you incorrectly classify an employee as exempt, your organization may be subject to wage and hour audits, significant penalties and lawsuits.
2) Failing to apply the latest laws and regulations – In just the past three years, no fewer than 10 federal laws have changed the rules regarding payroll. They include the American Recovery and Reinvestment Act of 2009, Hiring Incentives to Restore Employment Act of 2010, Affordable Care Act, and Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Failing to implement portions of these acts can cause you to over-withhold federal income and social security taxes, overcharge a laid-off employee for COBRA health insurance premiums, or incorrectly calculate taxable fringe benefits when reporting an employee’s income.
3) Incorrect Social Security numbers on W-2 forms – Incorrect Social Security numbers are the most common cause of erroneous W-2 forms. Not only can this result in a $100 penalty for each incorrect form, but the employee’s benefit record at the Social Security Administration may be understated, reducing his or her benefits in the future.
4) Incorrectly processing wage garnishments – Garnishments, levies and child support orders can be difficult to implement, especially when employees have multiple wage garnishment orders. Business owners are responsible for tracking and prioritizing each employee’s wage attachments to make sure you withhold and remit the deductions correctly.
5) Overreliance on payroll software – Today’s payroll systems are incredibly powerful and functional. But the clean and official-looking printouts can give a false sense of security. Even though your system is accurately performing millions of calculations, it is your responsibility to understand how these calculations are made, not only to ensure accurate input and compliance, but also so you can explain to employees how their pay is calculated.
6) Time and attendance reporting errors – Logging worked hours and re-keying them into payroll creates multiple opportunities for error. Underpaying employees can cause morale problems, while overpaying them creates a financial loss for your organization.
7) Improper tax reporting of fringe benefits – Holiday gift certificates, door prizes at company picnics…the Internal Revenue Code defines all forms of compensation as taxable unless explicitly stated otherwise. If you fail to report these as income and under-withhold the taxes, your organization could be subject to significant penalties.
8) Mistakenly treating employees as contract workers – In an attempt to keep headcount low, many companies hire temporary, work-at-home or freelance workers. But unless specific conditions are met, the employer will still be responsible for withholding, reporting and paying their employment taxes. Failure to do so could leave you liable for back taxes and penalties and potential overtime and minimum wage penalties.
9) Mishandling withholding for employees who receive third-party sick pay – In many companies, a third-party insurance company takes over salary payments to employees on short or long-term disability. But payroll managers often are not told the payments are being made to allow them to ensure the employer’s share of Social Security, Medicare and FUTA is paid and reported timely and correctly. They must also report federal income tax withheld and deposited by the third party on the employee’s W-2 form.
10) Missing a deposit deadline – Your deposit requirements are based on the total taxes reported on Form 941 during a four-quarter look-back period. Once your deposit calendar is determined, you must meet that schedule or be subject to tiered compliance penalties based on how late the past-due amount was deposited.
While this list provides a good sense of where companies can go wrong with payrolls, it is by no means complete. And in such a fast-changing and complex field, there may be new issues tomorrow. At a time when companies are already doing more with less, keeping up can be difficult. But the best way to protect yourself and your company is to stay educated and remember that, for better or worse, the only constant is change.
Reagan Dailey is Major Accounts Vice President of Sales, ADP Inc. in Houston