In 2013, IRS issued nearly 7 million penalties which totaled over $4 billion USD. That’s a hefty fine levied against small businesses and startups, where the errors tend to occur.
It’s easy to make a mistake, though, when you factor in that there are more than 15,000 tax codes in the United States, and those codes are updated on a regular basis – some even daily. That results in as many as 33% of small businesses and startups that catch fines for incorrectly processed payrolls
The most common cause of these mistakes comes when companies handle payroll on their own and don't understand the nuances and requirements in order to execute payroll properly. One of the biggest mistakes is when entrepreneurs misclassify employees as independent contractors which typically triggers a complete audit from the IRS.
Is It Wrong if the Money Is Still In Your Account?
Another common issue is when startups and entrepreneurs think they can “borrow” from payroll taxes including amounts withheld for Medicare and Social Security, amounts they are required to withhold on behalf of employees.
Taking or borrowing from these funds to cover operational costs is a large error, as this money technically belongs to the government – even if it’s still in your account. Borrowing it or misappropriating those funds is illegal.
Simple Mistakes Can Happen, but They Don’t Have To
Not every young company is out to misappropriate funds. If you’re a new or a small business trying to grow, any mistake you make is more than likely due to the sheer number of forms and tax filings that you’re required to do.
There are also taxes that must be filed at different times, with different authorities, which can be difficult to track when you’re tackling the entire process manually.
And when I say manually, I mean on your own, without the experience of a seasoned accountant.
According to a survey from GoDaddy, more than 46% of small business owners don’t employ or outsource to an accountant. This is a grave mistake given everything companies need to know to handle payroll properly.
Your time is best spent marketing your business, selling your products, and expanding your market share. You didn’t open your business to spend your time behind a desk manually calculating payroll.
Unless you want to be one of the 43% of small business owners who spend more than 3 weeks each year dealing with payroll taxes, according to a recent Small Business Taxation Survey from the NSBA, investing in an accountant or payroll software is probably a smart decision.
Knowing When to File and Pay Is Critical
“Every time an employee is paid, tax liability is due” according to Steve Johnsen, Compliance Lead at ZenPayroll. In addition to that “The states all have different filing frequencies, deadlines and rules. Some won’t accept paper filings; they need to be electronic. In some states, tax is a flat fee and in others it’s a percentage or graduated rate.”<.p>
That can make it hard to keep track of payroll when you have to worry about operational needs as well when overseeing your business. Consider all that on top of the fact that there are eight different payroll periods and two different deposit schedules, with taxes needing to paid within a specific number of days after an employee is paid.
You don’t necessarily have to stress over stumbling into payroll traps, though. Given all the complexities it’s easy to understand why businesses continue to move away from manual payroll calculation and are investing in outsourced payroll processing to web-based solutions.
Working with a payroll provider automates the majority of the process, eliminates the potential for grave missteps and errors and lets you focus on more important things – marketing and growing your business.
Don’t let fines hurt your business. Get payroll services for accurate calculation and timely finely today.