Common Payroll Mistakes: Top 5 Year-End Payroll Errors and How to Avoid Them
The SurePayroll experts in online payroll, labor law, tax regulations, HR, and benefits collected the top five errors to avoid during year-end tax preparation.
Have you ever made a mistake running payroll? According to the IRS, 40% of small businesses end up paying a payroll penalty each year.
Thankfully, most payroll mistakes can be fixed – but they come at a price. Not only does the average payroll mistake cost U.S. employers $845 in fines, but almost 50% of employees will start searching for a new job after only the second mistake on their paycheck.
If you want to finish 2022 strong – and set your business up for success in 2023 – it’s essential to avoid costly payroll mistakes during year-end. We recommend you prioritize payroll on your year-end checklist, start prepping for year-end tasks well in advance, and check out the top five payroll errors you should avoid below
Payroll Mistake #1: Misclassifying Workers
Why it’s a problem: When you classify am employee as exempt when they should be non-exempt (or vice versa), it could affect how much money they receive in their paycheck. For example, non-exempt employees are eligible for overtime pay, so if you have them classified as exempt, they won’t receive those funds. Additionally, since there are different requirements for 1099 workers vs. W-2 employees, failing to know the difference can make tax season a nightmare (and even trigger an audit with the IRS in extreme cases).
The fix: When hiring and onboarding your new employees, make sure they’re classified correctly from the start. If you’re bringing in a new role, ask yourself questions such as “are they working on a contract for X months?” or “am I dictating how this person does their job?” to differentiate between W-2 employees and 1099 contractors. Additionally, if you misclassified a worker in the past, change the status of your employee immediately, correct the wages, and ensure you get missing pay to them as soon as possible.
Pro tip: If you’re working with an online payroll service like SurePayroll, let us know about any changes you’re making in employee status or any mistakes you’ve made in the past. We’ve been in the payroll industry for 22 years, so we know exactly how to assist our customers in situations like this.
Payroll Mistake #2: Forgetting Bank Holidays
Why it’s a problem: Bank holidays are days when financial institutions are closed. If you pay employees via direct deposit, and payday falls on a bank holiday, your employees won’t get paid that day.
The fix: Year-end is full of bank holidays, so take a moment to review your payroll schedule and see if any paychecks will be impacted. If any of your paydays fall on a bank holiday, plan ahead and make sure you run payroll a day earlier so your employees get paid before the holiday. Alternatively, if you notice your error after it’s too late, let your employees know that their paychecks will be delayed as soon as you can.
Pro tip: SurePayroll always informs our clients when their paydays will be affected by a holiday, so working with a payroll provider like ourselves could help you avoid this situation entirely.
Payroll Mistake #3: Not Delivering W-2’s on Time
Why it’s a problem: Also known as a wage and tax statement, W-2 forms indicate the total gross earning of an employee over the previous year. Since your employees need their W-2s to file their taxes in the spring, the IRS requires business owners to send out W-2 forms by Jan. 31 at the latest. If you fail to meet the Jan. 31 deadline, not only will you inconvenience your employees, but you could also receive fines from the IRS ranging up to $270 per form.
The fix: By working with an online payroll service, you can receive your W-2s well in advance, distribute them to your employees easily, and avoid the stress that comes with missing the Jan. 31 deadline. For example, SurePayroll generally provides W-2s to our customers by Dec. 31, so we give you an entire extra month to ensure your employees receive their forms on time.
Payroll Mistake #4: Incorrectly Distributing Bonuses
Why it’s a problem: Recent studies show that 83% of employees who receive a year-end bonus show increased productivity and loyalty to their company. However, since the IRS counts bonuses as “supplemental wages” instead of “regular wages”, they’re subject to different federal withholding rules – meaning small business owners often make mistakes when distributing them. While you may think you’re doing employees a favor by giving them a little extra cash at the end of the year, disturbing bonuses that are incorrectly taxed will do nothing but harm your employees in the end, so beware.
The fix: Along with saving you up to 120 hours per year when it comes to running payroll, working with an online payroll provider like SurePayroll can also save you (and your employees) countless hours of stress when it comes to ensuring holiday bonuses are paid out correctly. Because SurePayroll offers several different tax guarantees – all of which promise that we’ll get your tax liability calculations correct (even on your bonuses) – you can treat your employees over the holidays without worrying about making mistakes.
Payroll Mistake #5: Not tracking Year-End Cash Flow
Why it’s a problem: Considering 82% of business failures are due to poor cash management, not tracking your finances is one of the biggest year-end mistakes you can make. Along with negatively impacting the financial health of your business in 2023, skipping out on analyzing your 2022 cash flow could put you in a position where you don’t have the means to complete essential year-end tasks (such as paying your vendors or employees on time).
The fix: According to a SurePayroll survey, cash flow is the second most common worry among small business owners. However, by preparing your essential financial documents at the end of each year, you can better track your finances, determine the health of your business, and put your cash-flow worries to rest. The main financial documents you need to prepare before year-end include:
- A balance sheet report showing your assets, liabilities, and equity
- An income statement report showing your revenue, expenses, and profits
- A cash flow statement report showing your opening and closing cash within the last year
Preparing and analyzing these reports can be confusing, but SurePayroll offers several accounting software integrations that can help you analyze your financial documents with ease, so consider checking them out. Additionally, if you find that you didn’t do as well as you thought after taking a look at your 2022 reports, there are plenty of things you can do to improve your cash flow in the upcoming year, so don’t be too hard of yourself.
Avoiding Common Payroll Mistakes: The Bottom Line
From meeting final deadlines to preparing for the new year, a hectic year-end makes it easy for a mistake to hit your books– and for a fine to hit your bank account. Throwing away valuable time and money isn’t an option if you want to have reach your goals in 2023, so along with following the tips above, consider using the end of 2022 to search for a payroll provider. Year-end is the best time to switch to a new online payroll service, and providers like SurePayroll start at just $19.99 per month. So what’s stopping you? Learn about the many ways a payroll provider could help your business in the upcoming year and get a free quote from SurePayroll today.
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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.