Top 5 Year-End Payroll Mistakes
As we quickly approach year-end, it’s important to get your payroll and tax-related ducks in a row to make the process a little smoother. We have previously discussed the risks associated with payroll and tax mistakes, including incorrect employee paychecks, and fines and penalties for missing important deadlines, but you should know that due to the nature of the end of the year, these mistakes can be even more impactful. Below you’ll learn about the common mistakes small business owners can make with their payroll and how you can avoid them.
Mistake #1: Misclassifying employees.
Resolution: At any time throughout the year, misclassifying workers is problematic because it means there is the chance they are being paid incorrectly. Additionally, as a small business owner, whether or not you are intentionally misclassifying workers, the error can be a red flag to the IRS and result in your business getting audited. The best way to prevent this mistake from happening is to think carefully when you are adding a new worker to your payroll. Answering questions such as “are they working on a contract for X months?” or “am I dictating how this person does their job?” can help you gauge the differences between an independent contractor and an employee.
Mistake #2: Not reviewing W-2’s.
Resolution: Ongoing payroll mistakes, such as misclassifying workers, can show up when it’s time to deliver Form W-2 to your employees. This is the form that they use to file their personal income taxes, so mistakes can really hurt them as well. Spend some time making sure that everything is accurate before you have to distribute to your employees.
Mistake #3: Not delivering W-2’s on time.
Resolution: Employers need to distribute W-2’s by January 31st. With a personal income tax filing deadline of April 15th, your employees are going to need their W-2’s as soon as you can provide them so they can meet with an accountant or tax professional if necessary. Wrapping W-2’s up by the end of the year will win you big points with your employees.
Mistake #4: Incorrectly distributing bonuses.
Resolution: Offering a year-end bonus to your employees is a nice gesture. However, it’s important to remember that the bonus is taxable income, meaning bonuses are subject to income tax withholding and FICA taxes. As a small business owner, you need to withhold these taxes just as you would with a regular paycheck.
Mistake #5: Not tracking year-end cash flow.
Resolution: For small business owners operating restaurants or retail stores, the end of the year is key to their business success. Due to the busy nature of the season, it’s crucial to have enough funds on hand to account for the extra expenses you may face. For example, you may have employees working overtime, or if you have extended hours, you could see utility bills increase. Since it’s a busy season, and your employees need to be paid on time because they have their own year-end expenses, it’s important to budget accordingly. If you find yourself struggling to manage cash flow, check out the five tips we have to help you in this blog post.
Year-end is a hectic time of year with payroll and taxes. From final deadlines to preparing for the new year, it could be very easy for a mistake to hit your books. In addition to avoiding the mistakes above, you’ll want to keep an eye out for new regulations or requirements for the new year so you can start the year on the right foot and mistake free.