The Payroll Blog
News, tips, and advice for small business owners
Payroll Training Expert Cory Hershman Offers Tips to Avoid Small Business Payroll Mistakes
Cory Hershman, online payroll training expert, reveals common small business payroll mistakes and shares her thoughts on whether you want to mess with the IRS.
Rarely do you hear a small business owner describe their passion as “making sure I file my payroll and taxes without triggering a visit from the IRS.” Most small business owners learn the ins and outs of payroll and taxes by trial and error, a practice that can sometimes lead to costly mistakes. In this season 2 episode of Back of the Napkin | Friday Fails, Cory Hershman, Associate Product Manager, SurePayroll, details how to prevent common small business payroll mistakes.
Common Mistakes for Payroll and Taxes.
People start their small business for any number of reasons. For some it’s a continuation of a family legacy, while for others it’s to monetize a passion. Whatever the reason, it’s unlikely most small business owners are payroll and tax experts when they open their doors, according to Cory Hershman, Associate Product Manager, SurePayroll.
Hershman suggests many employers are in for a rude awakening the first time they start paying employees.
“Hopefully you’ve received a paycheck from an employer at some point in your life and you take a look at it and you see the gross pay,” said Hershman. “You see what your employer is taking out for your employee taxes, and then you see your net pay. That’s really all you might know. When you start a small business and you’re on the other end of it, you’re the employer now.” And things look much different.
According to Hershman, many small business owners don't realize that in addition to gross pay, they must also pay roughly 10 percent in employer taxes to match Social Security and Medicare contributions, pay into federal unemployment, plus state unemployment if that's applicable for your business. “If you're going to pay somebody a thousand dollars in gross pay for the payroll, you can expect about an extra hundred bucks on top of that in employer taxes. That's something that we like to educate small business owners on because for budgeting purposes for payroll, it's super important,” said Hershman.
Another common mistake made by small business owners is misclassifying employees, an error that could have negative consequences down the line. “A lot of small business owners will just say, ‘Well, payroll taxes, it seems really complex. I don't want to deal with it so I'm just going to 1099 them.’ That’s usually not the right choice because the IRS has all kinds of resources on how to classify your employees correctly,” says Hershman. Misclassification doesn’t hurt just you as a small business owner; it also hurts your employees.
- W2 vs. 1099 Contractor. The IRS has resources on how to classify your employees correctly, and it is especially important to understand the difference between a W2 or Independent Contractor. If you erroneously classify an employee as an independent contractor, you may be held liable for employment taxes.
- Exempt vs. Non-exempt. While exempt employees are straight salary, a non-exempt employee is eligible for overtime. If they are misclassified as exempt (or as a 1099 employee), then they can miss out on potential overtime pay. Business owners will have to pay them back pay along with potential penalties.
Some small business owners inadvertently turn a happy occasion – the performance bonus – into an unfortunate event. “The main thing a small business owner would need to know about giving something like a bonus is bonuses don't happen every single payroll,” said Hershman. “What a lot of small business owners will do is they'll just tack it onto the bi-weekly or weekly paycheck. What that will do is it will use the tax table for bi-weekly or weekly payroll, depending on what you use, and it's actually going to take out more taxes from that bonus check than you would need to. Because it's truly a monthly bonus, it's not something you're giving to them as often as you're giving them their regular pay.”
Prepare to Prevent.
Some payroll mistakes are inconvenient, while others can be expensive to fix, or lead to triggering a visit from the IRS. Hershman recommends that small business owners take extra time initially to make sure payroll is set up correctly, rather than take the financial hit down the line.
Hiring an online payroll service like SurePayroll can ensure that payroll and taxes are set up correctly, enabling small business owner to focus on the passion that got them started in the first place.
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This website contains articles posted for informational and educational value. SurePayroll is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, SurePayroll. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. If you require legal or accounting advice or need other professional assistance, you should always consult your licensed attorney, accountant or other tax professional to discuss your particular facts, circumstances and business needs.