Top 5 Year-End Payroll Mistakes
Raise your hand if you’ve ever made a mistake on payroll. According to our Report, the Hidden Impact of Payroll, 32% of small business owners have made a payroll mistake, with the majority reporting they have underpaid an employee.
Thankfully, most payroll mistakes have a fix, but sometimes those fixes can be expensive or time-consuming. As we move towards the busy year-end season, it’s important to make payroll and taxes a priority on your year-end checklist so you can avoid the top year-end payroll mistakes. Below, we break down the top five and explain why it’s a problem and how you can avoid or fix it.
Mistake #1: Misclassifying workers.
Why it’s a problem: When you classify a worker as exempt when they should be non-exempt, or vice versa, it could affect how much money they receive in their paycheck. Non-exempt employees are eligible for overtime pay, so if you have them classified as exempt, they won’t receive those funds resulting in lower paychecks. Additionally, there are different requirements for 1099 workers and W-2 employees. Failing to know the difference can make tax season harder or, in extreme cases, trigger an audit with the IRS.
Resolution: When hiring and onboarding your new worker, make sure they are classified correctly at the beginning. If you’re bringing in a new role, answer 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. For exempt and non-exempt employees, determine if they will be paid hourly or a salaried to determine to classify correctly. If you need a fix for this mistake, start by changing the status of your worker. If you’re working with an online payroll service, let them know about this change, and they may be able to help you. From there, you’ll have to correct for the wages. When underpaying workers, you’ll need to ensure the missing wages get back to them as soon as possible.
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, employees will not get paid that day.
Resolution: The end of the year is full of bank holidays. Spend some time looking over your payroll schedule to see if any paychecks will be impacted. If payday does fall on a bank holiday, plan ahead and make sure you run payroll a day earlier so employees get paid before the holiday. If you notice this error after the fact, let your employees know as soon as possible that they will receive paychecks a day or two late.
Mistake #3: Not delivering W-2’s on time.
Why it’s a problem: Employees need to receive W-2’s by January 31st. According to the IRS, as long as W-2’s are in the mail by January 31st, you are ok. However, the sooner you can deliver this important tax form to employees, the better as they will need it for the personal income tax filing deadline of April 15th.
Resolution: If you work with an online payroll service, you should receive W-2’s from them and distribute them accordingly. For example, SurePayroll delivers the majority of W-2’s by December 31st each year giving small business owners plenty of time to get W-2’s to employees. If you can’t get W-2’s to employees by the January 31st deadline, you can request an extension from the IRS. However, it’s important to note that you will likely face a penalty for this.
Mistake #4: Incorrectly distributing bonuses.
Why it’s a problem: Offering a year-end bonus to employees is a nice gesture. Bonuses can boost employee engagement and ensure your employees feel appreciated. However, bonuses and holiday pay need to be treated like a traditional paycheck, meaning they are subject to payroll taxes.
Resolution: Skip cash bonuses and withhold the same amount of payroll taxes from bonuses. While you may think you’re doing employees a favor by giving them a little extra cash at the end of the year, it can hurt you both later during tax season.
Mistake #5: Not tracking year-end cash flow.
Why it’s a problem: Year-end tends to be a busy season for many small businesses. Even if you’re hoping for some snow this season, it's important to see green when it comes to your books. If you don’t have enough cash on hand for some reason, it may be difficult to pay employees, offer a bonus, or pay vendors or other important business expenses on time.
Resolution: According to our report, The Small Business Worry Index, cash flow is a top concern among small business owners. While prioritizing cash flow should always be a goal, it’s extra essential at year-end. If there is a chance your business will struggle this busy season, try to prepare as much as possible. Some year-end cash flow tips include offering incentives for paying with cash, boosting promotional offers, and researching loans or other lines of credit.
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.
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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.